Understanding currency moves over the intermediate and longer term is a matter of understanding which ones are "relatively least miserable…" In my view, currencies are analogous to a group of individuals that are arguing over who is more miserable. The country that is relatively less miserable will see its relative price rise.
Governmental and monetary institutions are inherently inefficient and wasteful in general and usually do not have the long term value of their respective country(s) in mind when making policy decisions, this has especially been the case since the early 1970's when the Bretton Woods monetary system was abandoned….
So, for the last few years, the US has been the relatively more miserable currency. But are the others now catching up in this regard? No, I don't think so, at least not for the foreseeable future. Although some in the financial world are currently playing the USD on the long side looking for short term rallies, the long term trends remain intact. The stagflationary recession scenario continues to play out and gain strength. Short term governmental bailouts will prolong the problems and undermine the long term health of the economy. Treasury rates will likely go lower, and risk premiums will remain high in the short and intermediate term, equities will struggle, and the long term commodity bull market will go on. The Fed now cares more about politics and short term growth than the long term health of the USD and economy. Booms and busts are the norm. Learn to profit from them and exploit market conditions.
In my view, the currency game is just too volatile a game to play in a "day trading" fashion. However, over the intermediate and longer terms the trends in currency prices are very obvious and fairly easy to predict. Latch onto one of these long term trends and you can make a bundle. That is in fact what many investors have done since the USD topped out in 2001-2002.
One thing that hurts a lot of investors (and used to be one of my Achilles heels) is being wrong in the short term but correct in the long term. I was usually correct with my longer term forecast but would always screw things up with my short term tactical decisions. One of the obvious secrets to success in life is to play to your strengths and not your weaknesses and develop a good "Personal Competitive Advantage" that is aligned to your individuality. If you have the temperament of a long term investor and hate sitting in front of the computer for 20 hours a day, don't try to day trade the currency markets, you will likely wind up with a lot of stress related illnesses and a smaller account. However, if you are the type of person who thrives on that kind of moment by moment action, more power to you, you have my respect….
Another key to success is to align strategy and tactics to what I call the "temporal dimensionality" of your position. Is the expected time frame of the position you entered aligned to your strategy and market conditions? Risk/Reward changes when you consider it in the various temporal dimensions that are a part of your strategy. If you are taking a position with the long term trend in mind, you need to be prepared to ride out any short term corrections that may occur. If you are correct in your view of the long term trend, a short term move against you is not fatal. Likewise, if you are trading for a correction against the long term trend (something I do not recommend) you need to be very vigilant to get out if the long term trend reasserts itself.
If you short the USD Index here in mid February at roughly 76-77, obviously, over the short and intermediate term you are exposed to a correction against the long term trend. The degree of price movement in the short term has a big impact on the risk/reward of a position entered. If you are seeking to profit from a long term trend, you either ride out the corrections against that trend, or just don't play again until you feel the correction is over. Of course, if the fundamental analysis that sets the context of strategy changes along with the long term trend, I will gladly change strategy. The worst thing anyone can ever be is dogmatic and uncritical of their theories. --John Bardacino