The recent fall in the value of the Australian Dollar, while painful for Australians looking to travel overseas, has proven popular with many traders whose trading accounts are denominated in US Dollars.

From a traveller’s perspective, every cent that the Australian Dollar falls means less spending money in their pockets when they convert their Australian Dollars into US Dollars.

However, the sharp falls have eased the pain of those traders watching their US Dollar accounts erode in value with the strengthening Australian Dollar.

Imagine you were a trader who wanted to trade options on the US market. You open an account with a US Broker in 2002 and send over $A10,000 to fund your account. With an exchange rate of 0.5000, you now have $US5,000 in your account.

Now imagine you are a conservative trader and over those 6 years you managed to double your trading account. Your trading account is now $US10,000.

Now you decide to bring the money back to Australia. However, it’s 2008, and the exchange rate is now 0.9800 (98 cents). Suddenly, you need 98 US cents just to buy 1 Australian Dollar, whereas six years ago, you only needed 50 US cents.

Now your $US10,000 – which was double your initial investment - is only worth $A10,204. Nearly all of your gains have been wiped out by the exchange rate fluctuations. Can you see the importance of managing your currency risk?

Chart 1 below shows the weekly bar chart of the Australian Dollar (FXADUS in ProfitSource)

Chart 1

click to enlarge

As you can see, it is not just Currency Traders who are faced with the risks associated with changes in the exchange rate. Of course, had the trader waited until October to bring their US Dollars back to Australia, the exchange rate would have been much more favourable for them.

Anyone with any exposure to overseas currencies, whether through their trading, their travel plans, or business transactions needs to manage their currency risk.

So how can we go about it?

The simplest way to lock in the exchange rate today is to open an FX trading account. Let’s say we have some US Dollars sitting in a bank account in the United States.

If the Australian Dollar rises in value, the US Dollars will fall in value, meaning less Australian Dollars should we decide to bring the money to Australia. To lock in the current exchange rate, we can open an FX hedge by opening a currency position.

In any FX transaction, we are always buying one currency, and selling a second currency.

So in this case we would open a position that would buy Australian Dollars, and sell enough US Dollars to cover the money in our US bank account.

As long as there is enough money in your FX trading account to cover the margin on the trade, you will be able to leave this hedge open until you are ready to bring your US Dollars back to Australia. If Australian interest rates are higher than US interest rates, you can even be paid interest on your position, in what is called a “carry trade”.

If you have US Dollar exposure and you don’t check the exchange rates very often, it can be a good idea to hedge your position and lock in your exchange rate, to remove the possibilities of any nasty surprises.

There are other methods for locking in an exchange rate using Forward Exchange Contracts and options, however that is a subject for another article.

* Dollar rises against yen after U.S. durable goods

* Housing, sentiment data to come

* Oil recovery, equities remain in focus (Adds comments, byline, updates prices)

By Wanfeng Zhou

NEW YORK, July 25 (Reuters) - The dollar rose against the yen on Friday after a government report showing an unexpected rise in durable goods orders eased worries over the U.S. economy.

The solid reading lifted sentiment on stocks and spurred a recovery in risk appetite, putting pressure on the low-yielding yen. The dollar also pared some of its losses against the euro.

Durable goods orders were up 0.8 percent in June, after a revised 0.1 percent gain in May, the Commerce Department said on Friday. When volatile transportation orders were excluded, orders climbed 2 percent last month, the sharpest rise since December. For details, see [ID:nN24332112].

“All in all, a strong piece of data for the U.S., in contrast with fresh signs of weakness in Europe and the UK,” said Brian Dolan, chief currency strategist at Forex.com in Bedminster, New Jersey. “I think stocks will like it, yen crosses will too, and the dollar also.”

In early trading in New York, the dollar rose 0.3 percent to 107.72 yen

The euro traded 0.2 percent higher at $1.5700 <EUR=>, still roughly 3 U.S. cents below a record high set in mid-July.

The euro also jumped 0.5 percent to 169.05 yen <EURJPY=>.

MORE U.S. HOUSING, CONSUMER DATA

Despite getting a boost from the much-stronger-than-expected durable goods orders data, sentiment on the greenback remained cautious as market participants awaited more U.S. data later in the day, including new home sales for June and a consumer sentiment poll for July.

Against a basket of six major currencies, the dollar remained 0.2 percent lower at 72.791, retreating from Thursday’s two-week high .DXY.

The Commerce Department’s housing data will be closely watched after disappointing news on existing home sales released on Thursday sent the dollar down sharply against the yen.

But some analysts said that the scope for weak U.S. data to hurt the dollar was limited as a fairly negative U.S. picture is already priced in, and euro zone economic data has also been coming in on the weak side.

“The expectations are for lower readings across the board, but the impact of FX trade may depend on the degree of the decline,” Boris Schlossberg, senior currency strategist at DailyFX.com, said in a research note.

“With markets already so preconditioned to bad economic news from the U.S., the greenback may not weaken much further unless the data shows substantial deterioration from the prior month.”

The euro edged higher on Friday despite figures showing a slowdown in money supply growth [ID:nFAE002362].

The single currency hit a two-week low against the dollar on Thursday after data showed German business sentiment suffered its biggest drop since September 2001, while euro zone PMIs pointed to contraction in both the services and manufacturing sectors. (Additional reporting by Gertrude Chavez-Dreyfuss in New York and Naomi Tajitsu in London, Editing by Jonathan Oatis)

* U.S. consumer sentiment rebounds from 28-year low

* Durable goods, housing top consensus

* Oil prices, equities remain in focus (Recasts; updates prices, changes byline)

By Vivianne Rodrigues

NEW YORK, July 25 (Reuters) - The U.S. dollar rose against the Japanese yen on Friday, after a trio of better-than-expected data injected a dose of optimism aboutthe U.S. economy.

The upbeat readings on U.S. durable goods orders, new-home sales, and a rebound in consumer sentiment from a 28-year low allayed some of the recent gloom over the economy and financial markets, sending stocks higher and giving a boost to the beleaguered U.S. currency.

“This is perhaps the best we could have ever hoped for amid the current economic conditions,” said Michael Woolfolk, senior currency strategist at The Bank of New York Mellon in New York.

“It flies in the face of the pessimists out there calling for a recession. It’s just simply not reflected in the numbers,” he added. “The dollar rally gets a strong green light to continue buying.”

In late trading in New York, the dollar rose 0.5 percent to 107.87 yen <JPY=>, after climbing as high as 107.94 yen, slightly below a one-month high of 107.98 yen set on Thursday, according to Reuters data. 

The euro traded 0.1 percent higher at $1.5693 <EUR=>, roughly 3.0 cents below a record high set in mid-July.

Against the yen, the euro jumped 0.6 percent to 169.34 yen <EURJPY=>.

But on the New York Board of Trade’s U.S. dollar index .DXY of major currencies the U.S. dollar remains trapped in its range of the past four months, after seeing a big slide last year.

U.S. durable goods orders were up 0.8 percent in June, after a revised 0.1 percent gain in May, the Commerce Department said Friday. For details, see [ID:nN24332112]

Separate data showed sales of new homes in the United States fell to a 530,000 annual pace last month, against market expectations for a drop to a 500,000 rate, while consumer sentiment recovered unexpectedly in July after falling in June to the lowest level since the early 1980s. [ID:nN25494864] [ID:nN25487506]

OIL, EQUITIES IN FOCUS

Gains in U.S. equities and a continued drop in oil prices to a seven-week low on Friday further lifted sentiment toward the dollar. U.S. crude futures last traded down 1.7 percent, at $123.37 a barrel.

“We are really seeing a couple of different factors shape up: oil dropping, equities rally and clearly the good data, which should support at least a minimum dollar rally to yesterday’s lows (on euro/dollar),” said Greg Salvaggio, vice president of trading at Tempus Consulting.

More good news on the mortgage sector added to dollar strength. The U.S. Senate voted on Friday to limit debate on a bill aimed at shoring up both the housing market and mortgage finance companies Fannie Mae (FNM.N: Quote, Profile, Research, Stock Buzz) and Freddie Mac (FRE.N: Quote, Profile, Research, Stock Buzz), paving the way for a final vote that is expected on Saturday.

But some analysts cautioned that the impact on the dollar from Friday’s positive data may be limited.

“The follow-through will be distinctly limited,” said Alan Ruskin, chief international strategist at RBS Global Banking and Markets, in a research note.

“The next real lead on the economy comes from the ISM numbers, and by far the most important data — nonfarm payrolls — in a week,” he said.

The euro hit a two-week low versus the dollar on Thursday after data showed German business sentiment suffered its biggest drop since September 2001, while euro zone PMIs pointed to contraction in both the services and manufacturing sectors. (Additional reporting by Wanfeng Zhou and Lucia Mutikani in New York)