If you’d asked a novice forex trader before the subprime meltdown in 2007, if there was an obvious correlation between volatility in the American mortgage market and currency rates, you may have received a puzzled look. Since then, people’s recognition of the words “Credit Default Swap” has expanded exponentially; even if they don’t necessary know what this structured product is and how it impacted the subprime fallout, they know these words are somehow involved!

But let’s look more closely at how the movements of the U.S. housing market can have a direct effect on foreign exchange. Every forex trader, be they a veteran or newbie who wants to learn forex, should be aware of the connection.

Most essentially, the sheer gravitas of the U.S. dollar means that every forex trader should be keeping up to speed with the U.S. housing market and its vicissitudes. This is one of the biggest lessons learned from 2007, where the subprime mortgage crisis led to a slump in the US housing market, decimated the US economy and then caused a ripple effect across the western developed economies in one very devastating swoop.

The Heavyweight Dollar Packs a Serous Punch

The US Dollar is the highest traded volume currency in the world. As such, its force will be felt by forex trader, for better or worse. When the US housing market falls into a slump, this has a negative effect on the US economy as a whole, with poor financial results leading to a change in forex traders’ behavior with the US dollar. It will also have a cataclysmic effect on a range of financial indicators, such as mortgage futures’ values. This will once again impact negatively on the US dollar. In light of this, it is very clear that the U.S. housing market can and does have an oblique but nonetheless powerful effect on foreign exchange.

Even if you do not trade in US dollar, you need to know the impact that it can have on your own trading profits and risk exposure. As the US dollar is at such high liquidity, it follows that anything negatively affecting the US dollar will in turn affect the US economy and lead to a domino effect, eventually having a negative trickle-down on your own currencies of choice.

Rick Silver is a Financial Writer and contributor to Everest Forex. She spent many years working at leading U.S. investment firms and banks, within the fields of foreign exchange, commodities, structured finance, asset finance and corporate finance.

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