Retail Investors Pile Into Currency Trading As Euro Slides To Parity With Dollar

While foreign-exchange trading has historically been reserved for specialty desks on Wall Street, big swings in global currencies have enticed DIY traders into the complicated world of FX.

The euro in particular has caught their attention with its swift downward spiral, dropping last week to dollar parity for the first time in 20 years. A tumultuous year for the region — from the war in Ukraine to an energy crisis and the growing risk that Russia cuts off gas exports — is increasingly likely to push the euro zone into a recession, while higher interest rates in the US are making the dollar look more attractive by comparison. 

Greg Doscher, a 40-year-old retail trader in Santa Barbara, California, has seen a 322% gain after pooling approximately $10,000 on a short position on the euro that he opened in late January. Despite soaring inflation, he argues the European Central Bank won’t act as aggressively to raise rates as the US Federal Reserve, further strengthening the dollar. 

“It's just kind of a wild experiment,” he said. “As yields started to go up and spike in the US, it just seemed pretty obvious that there was going to be a flow of money out of the euro and into the dollar. It opens up these kinds of crazy differentials.” 

Betting on the Dollar 

Shawn Cruz, director of derivative product strategy at TD Ameritrade, said he's noticed retail clients are “hyper focused” on the strength of the US dollar. Bullish bets on the greenback have garnered a cult-like following among retail traders online, similar to the meme-stock frenzy for Game Stop Corp. and AMC Entertainment Holdings Inc. last year.Traders outside the US are also getting into the action. Online brokerage eToro, which has users in more than 100 countries but doesn’t offer FX trading in the US, saw a 79% increase in positions opened in the euro-dollar market in the first two weeks of July compared to the same period in June. There’s also been a 72% month-over-month increase in trading volume. 

“Euro-dollar parity is the biggest line in the sand in global currency markets, and retail investor interest has surged as its breach has neared,” said Ben Laidler, a global market strategist at eToro. “With lots of markets in freefall or stagnant this year, opportunities for investors have been limited, but USD has been one of these opportunities — and retail investors have responded.” 

Traders have been wagering that the strong dollar will hurt US-based tech companies, which get a big chunk of their earnings from abroad, Cruz said. They’re also betting that a rallying US currency will put downward pressure on commodity prices, which are usually priced in dollars and therefore fall as the greenback strengthens.

Retail traders seeking exposure to currencies often use exchange-traded products, or options on those products. For example, they might use options contracts to bet against European equities that are likely to be hurt by weaker growth in the euro zone.

Buyer Beware

Financial experts caution that wading into the foreign-exchange market can be risky due to the inherent volatility of currencies. The saying “caveat emptor,” or buyer beware, applies to currency trading even more than it does to traditional financial markets, according to Chris Zaccarelli, the chief investment officer at Independent Advisor Alliance.

Another issue is the “potential for FOMO trades” among retail investors, according to Andy Constan, chief executive officer of Damped Spring Advisors. The common currency jumped above the dollar once again and rose to a two-week high on Tuesday, with markets pricing in a more aggressive pace of interest-rate hikes from the European Central Bank.

“The euro has already fallen a lot, so the time to get in and make a profit has already happened,” he said. “To get on the bearish euro train at this late stage is not a good idea.” 

(Updates to add that eToro trading numbers are global.)

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