Forex trading is usually run by Wall Street professionals, but the recent weakness in the euro has attracted retail investors to speculate.
The euro fell sharply last week to parity with the U.S. dollar for the first time in 20 years, and retail investors also noticed that the pace of interest rate hikes in Europe was far behind the U.S. Federal Reserve, making bets on the dollar more attractive.
Shawn Cruz, head of derivatives strategy at TD Ameritrade, said he has noticed retail investors’ focus on a strong dollar. Right now, retail investors are betting wildly on a stronger dollar, similar to the meme-stock mania of Game Stop Corp. and AMC Entertainment Holdings Inc. last year.
Traders outside the U.S. also joined in. According to data released by eToro, an online brokerage firm, in the first two weeks of July, traders opened positions in the euro-dollar market by 79% compared with the same period last year, and the trading volume also increased by 72% compared with the previous month.
With many markets down this year and limited opportunities for investors, trading the U.S. dollar is an investment opportunity for them, said Ben Laidler, global market strategist at eToro.
Traders have been betting that a strong dollar will hurt U.S.-based tech companies that generate most of their revenue abroad, Cruz said. They are also betting that a rising dollar will put downward pressure on commodity prices.
Financial experts warn that dabbling in the foreign exchange market can be risky due to the inherent volatility of currencies.
Chris Zaccarelli, chief investment officer of Independent Advisor Alliance, said that compared with the traditional financial market, the phrase “buyer with caution” is more applicable to foreign exchange transactions, and buyers should do their own investigation and evaluation.
Another issue, according to Andy Constan, CEO of Damped Spring Advisors, is the fear of missing out (FOMO) trading mentality among retail investors. The euro has already fallen sharply and it is not a good idea to join the bearish bandwagon at such a late stage.