Interesting, the rate of reserve accumulation has slowed markedly from 2009. In the first quarter of 2010, the reserves grew by “only” $45 Billion, compared to growth of $125 Billion in the fourth quarter of 2009. There are a couple key explanations for this slowing. First, China’s trade balance has narrowed considerably over the last twelve months, to the point that it in March, it recorded its first trade deficit in six years. Second, China tallies its reserve growth on a net basis – after accounting for changes in valuation. Given that the majority of China’s reserves are still denominated in US Dollars, then, the Dollar’s appreciation over the last quarter may have shaved $40 Billion from the accumulation of new reserves. With this in fact in mind, the actual slowdown is probably much less pronounced than the numbers would suggest.

Besides, exports and foreign direct investment both continue to grow at healthy clips, which means there is nothing (barring a revaluation of the RMB) which could significantly slow reserve accumulation going forward. Even with a revaluation (that many experts believe is imminent), the need to further accumulate reserves will not be impacted, because the RMB will certainly continue to be pegged to the US Dollar. In order to prevent price inflation (which is already creeping up) from reaching dangerously high levels, then, the government will have no choice but to continue to soak up all capital inflows for as long as the RMB remains pegged.

The first reason for Forex market to accumulate or consolidate is when all countries are expecting something important to happen and traders stop their trades in anticipation of essential market moves or breakouts after the world event. When the trades stop happening on the Forex market, it starts to consolidate on a small trading range. These tight or small trading ranges might move between 20 and 60 pips. You can see these moves on shorter time frame charts like 30 minutes charts.

The second important reason for the currency market going into accumulation mode is in case a big central bank is going to intervene in the Forex market in order to support its currency. Very often central banks think that the currency is depreciating or appreciating too much. So in order to stabilize the currency exchange rate banks make a decision to intervene in the market. Global market gets to know the news fast and it quickly starts to consolidate expecting the major market move. Central banks Forex market intervention is typically done to boost the countries’ exports or reduce the imports’ prices for the country.

Let’s look at the following example. Let’s consider Japan as the one of the biggest economies of the world. The market watches every move of the Japanese Central Bank. Sometimes the bank has to get involved in the Forex market in order to stabilize the countries’ currency – Japanese Yen. Let’s imagine that Japanese Central Bank intervenes into the Forex market in order to stabilize the Japanese Yen between 110 and 115 JPY to the US Dollar. This range estimates 500 pips. So the bank wants the currency pair JPY/USD rate to fluctuate between these 500 pips. The market can anticipate this intervention and it might take days or weeks for the bank to intervene in the market, which is why everyone on the Forex market watches very closely what the bank is doing.

When this happens, the market usually enters an extended period of moving sideways, which may last weeks or months. During this time you might find large trading ranges in the market, which could be observed on the daily chart.

Forex market gets often locked in such consolidation periods and you, as a trader, should definitely learn how to handle trading these ranges. You can get a lot of rewards by learning how to trade during consolidation market movements.

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Each of us has different associations with wealth. Some feel a responsibility, when they think about wealth. It’s the responsibility to increase and protect this wealth or the responsibility to make it somewhat worthy of attention. Others think about freedom and independence. Some people think about security. Someone thinks of luxury cars and luxurious mansions and his social status. And another one feels that the wealth implies petty materialistic concerns and consequently prevents the “true spirituality”. In the extreme points of view, one sees wealth as the highest good thing, while others consider it to be evil.

Since the purpose of trade is to create wealth or at least to earn money, it is fundamentally important as you, as a trader interpret the accumulation of financial wealth. If you feel in the subconscious, that there is something wrong or selfish and evil in the accumulation of financial wealth then find a way to reduce such thoughts. In fact trading is not the activity for those who are in an internal conflict of the importance of earning money.

I know that one trader who feels the increasing internal pressure, when he wins. He realizes that he hasn’t definitely stolen the money from another trader just because he can win. He realizes that he must earn money for himself and his family. But in the subconscious, he takes money from others, when wins and feels a connection with this.

One day a trader came to me. He made approximately $ 5,000 per day, trading on the New York Stock Exchange and wanted to make $ 10,000. It seemed to me an easy task. If you can make $ 5,000, you can make and $ 10,000. Unfortunately, this trader limited his earning with $ 5,000. In addition, 5,000 dollars were earned by his father. He had to withdraw funds from these psychological limitations.

So I advise you to start examining different beliefs that support the creation of wealth. In the meantime, ask yourself: “Is there something in my belief that, as I believe, prevents the establishment and maintenance of the accumulation of wealth?” There are some ideas and bad ideas, which can cost you money in your entire life. You shouldn’t ignore this issue if you want to become a successful trader. Check your thoughts very attentively like pilots check their airplane before taking off.

It is really important to know that forex trading is not a casino, no matter how close to this it looks.

That is why, those who start buying and selling on the currency exchange market, are making a big mistake.

And this is where a good forex book can be of real help.

Of course, it makes no sense to trying going through all forex book info in the world, but extra info is not an extra.

First of all, the G7 concluded its latest round of talks. Despite previous indications to the contrary, the organization continued its practice of releasing a communique. in which it noted that global economic balances persist and that policymakers should work together to mitigate them. While seemingly benign and desirable, the proposition couldn’t have come at a worse time for the Dollar.

The only reason why the Dollar hasn’t collapsed completely is because economies largely continue to recycle their surplus wealth and trade surpluses back into Dollar-denominated assets. One columnist connects the dots with regard to the forex implications: “Less Chinese intervention to prevent yuan strength would mean China, slowly over time, would build up fewer dollar reserves.” In other words, economies no longer concerned with pegging their currencies would have very little reason to build up large pools of reserves.

In fact, China is fully on board with this notion. Following the G7 talks, Chinese officials announced that it would support a stronger Yuan as soon as the global economic crisis resolved itself. By its own reckoning, this would facilitate a shift in its economy, from one dependent on exports for growth to one focused around domestic consumption. Still, obstacles remain, and “It is far from clear how China can engineer a shift up for the yuan against the dollar, which analysts note would almost certainly translate into a gain against other currencies as well.”

Speaking of China, it is also among the most vocal of nations laboring for alternatives to the Dollar. Towards this end, it has reportedly formed a secret coalition with the other BRIC countries (Brazil, India, and Russia), as well as Japan. The goal is to end the pricing of oil in Dollars by 2018. That the group has given itself nine years to complete this task speaks to its extraordinary ambition.

The implications for the Dollar cannot be understated. A handful of oil-producing nations in the Middle East hold a combined $2.1 Trillion in Dollars, which are solely a product of selling oil in exchange for Dollars. Already, the government of Iran has mandated that in the future, all of its reserves be held in non-Dollar-denominated assets. Thus far, no other countries have followed suit. China is aware that pushing for further developments could roil the US, which would be unlikely to sit on the sidelines and watch its currency be summarily jettisoned. “Sun Bigan, China’s former special envoy to the Middle East, has warned there is a risk of deepening divisions between China and the US over influence and oil in the Middle East.”

Robert Zoellick, president of the World Bank, doesn’t harbor any illusions, and announced during a recent speech that the a decline in the role of the Dollar is inevitable. “He said the United States ‘would be mistaken to take for granted the dollar’s place as the world’s predominant currency. Looking forward there will increasingly be other options to the dollar,’ ” such as the Chinese Yuan and the Euro.

Zoellick’s warnings were prescient, when you consider that the IMF just announced that the share of Dollars in global foreign exchange reserves declined significantly in the most recent quarter, perhaps to its lowest share since the Euro was introduced in 1999. [The latter, however, has yet to be confirmed].  “The dollar’s share in global reserves declined to 62.8% from 65.0%…The euro’s share increased to 27.5% from 25.9%.”

JP Morgan’s research team has discovered a similar trend- that accumulation of US assets accounts for only half of the global increase in global forex reserves. “Quantifying this trend is always imprecise. But the circumstantial evidence — official buying of U.S. assets runs at only half of the pace of global reserve accumulation — suggests that diversification has accelerated since June.”

So, there you have it. The Dollar’s demise (to borrow a characterization by one of the columnists featured in this post) is no longer theoretical. It may have already begun…

The credit crisis was initially marked by a collapse in trade and an exodus of capital from Asia, as western consumers tightened their wallets and investors flocked to so-called safe havens. As developing countries fought off currency depreciation, forex reserve levels plummeted. Less than a year later, trade has already picked back up, investors have returned en masse to emerging markets, and Central Banks are once again sterilizing capital inflows so as to mitigate upward pressure on their respective currencies. [Chart Below courtesy of Council of Foreign Relations.]

“Taiwan and Thailand, the most aggressive in defending the U.S. currency, have logged record-high reserves every month since December.” Japan, whose reserves are the second highest in the world (after China), is the lone holdout. As the Forex Blog reported yesterday, the newly elected Democratic Party of Japan will pursue an economic policy that depends less on exports, and has pledged to stay out of the forex markets.

The prospects for further reserve accumulation remain reasonably bright, as emerging markets lead the global economy towards recovery. “The outlook for key Asian economies is improving faster than that of developed economies. For the time being, this should accelerate flows into these markets, making it harder for central banks to keep their currencies in check.”

While China’s economy is no exception, its nascent recovery is being driven by capital investment, government spending, and (ultimately?) consumer spending. As a result, it is forecast that “China’s current-account surplus will fall to under 6% of GDP this year and 4% in 2010, down from a peak of 11% in 2007. Exports amounted to 35% of GDP in 2007; this year…that ratio will drop to 24.5%.” If such an outcome obtains, it will almost certainly lead to a slower accumulation of reserves.

While this is all well and good, the more important question for most (forex) analysts is how these reserves are being held. The vast majority of these reserves are still denominated in US Dollar assets, and in fact, the proportion may have risen slightly since the beginning of the credit crisis. Asian Central Banks are particularly biased towards the Dollar, which accounts for 70% of their reserves, compared to the worldwide Central Bank average of 64%.

Moreover, it doesn’t look like plans are afoot to change this trend anytime soon. China has maintained its push (though less vocally) to turn the Chinese Yuan into a global reserve currency, declaring that its capital markets and currency controls will open accordingly to facilitate such. It is in preliminary talks with Thailand for yet another currency swap agreement, to supplement the $95 Billion in such deals signed since December. For its part, the Bank of Thailand has insisted that the Yuan is not even close to challenging the supremacy of the Dollar: “You have to accept that the dollar is going to be a reserve currency for quite some time. You don’t have any alternatives.”

Even China, despite its rhetoric, remains committed to the Dollar. The only talk of diversification in Chinese investment circles is in regards to what kinds of US assets they should invest in, not whether they should be invested in the US or somewhere else. Said the manager of China Investment Corp, which has a mandate to invest nearly $300 Billion of China’s FX reserves, “The risk of a decline in the dollar risks was more of a national issue for China than for CIC because its capital is in dollars.”

This last quote inadvertently confirms that the role of the Dollar as the world’s reserve currency is being treated as a political issue, when in fact it is a financial economic issue. In other words, while many countries want to limit the influence of the US by limiting the power of the Dollar, their Central Banks are stuck with it because it remains the most practical, and advantageous option. Dumping it would be akin to punishing themselves.