Sunday, January 06, 2008

Dollar Bottom?

The Tigerhawk asks the question and points to a New York Times Business Section article that quotes Ed Yardeni of Yardeni Associates, Mr. Yardeni has probably seen it all in the currency and interest rate markets. I will first stress that I am not a currency trader and that although I once clerked for a currency trader that was the year that the Bears won the Super Bowl, so like Tigerhawk my prediction may have all of the probability of a coin toss. However I have to confess that I have been wondering the same thing for the last several months. My comments to others have been something along the lines of "I think that we are close time-wise but I have no idea price-wise." Attempting to pick tops or bottoms in markets has always been dangerous, one of the great old-timer's sayings that remind against hubris is "Confucius say, he who pick bottom get stinky finger." Crude, yes but then again you won't forget it anytime soon. The same sentiment should be remembered when one is trying to pick the top of a market. There can always be dramatic revaluations in markets.

The odds are against dramatic revaluations although we certainly see those regularly amongst the world's currencies, the US Dollar against the Japanese Yen (until about '95) comes to mind. An utter loss of confidence in the Dollar would be a serious problem partially because of it's use as an official reserve currency by governments around the world but also to a lesser extent due to the fact that so many physical hundred dollar bills are in circulation in the world that the Fed largely ignores the uncountable hordes of dollars outside of our borders.

The loss of value of the dollar has been most dramatic in relation to the European currencies, as measured against the continental currencies of the Euro and the Swiss Franc and of course the granddaddy of modern currencies, the British Pound. Currency markets tend to make long, wide swings and their trends often last for years. Strategies like the currency carry trade can keep those trends going for years as the profits roll in, however when the merry-go-round stops the participants in the carry trade just add to the ugliness. Recent headlines have screamed that the British Pound is at it's highest price in relation to the dollar since 1981, what they don't tell you is that whereas the Pound exceeded $2.05 last November it was trading near $2.40 during the 1st quarter of 1981. The Swiss Franc shows a different story, the historic link to gold (a requirement of 40% reserve held in gold) was ended in 2000 and the Franc is at it's high price of at least the past several decades.

Public sentiment is something that traders always try to be keenly aware of and we have a tendency to want to be on the other side of whatever is the overwhelming sentiment of market participants at extremes, for the simple reason that once all of the people who want to buy something at a certain price have bought then there is nobody else left to pay those prices and prices will sag. The reverse is true for sellers in down markets. It also must be said that the world of modern communications has changed this dynamic, certain web sites aside the world is simply better informed and informed more quickly than years ago. With all of that said there has been quite a bit of dollar-defeatism in the media and the popular culture, combine that with conversations that I had over the holidays concerning exchange rates with otherwise well educated people who really had no background to understand what they were trying to say makes me feel that we may seeing a bottom. Stay tuned to the CME.

This is in no way an endorsement of any trading strategy.

Labels: , , ,


Blogger Publia said...

Hope you are right. It hurts seeing Americans grow poor in relation to the world.

Why can't we be more like the Swiss when it comes to currency? That one just goes up and up and up.

Oh, and as far as politics go, futures may be so last century. Check out this one; and this:

9:48 AM  
Blogger El Rider said...

They say that they have already paid off on the Obama bets? That seems kind of strange, a great PR gimmick no doubt; I mean, God forbid, what if something happened to the guy? Someone else would win. That bet normally wouldn't be paid off until Thursday night of the convention. Btw, I have one of those British accounts and played it during 2004. As to the value of the dollar, I also hope that we have seen the worst. The extremes of these things can sometimes get out of hand, another old adage is that markets can stay irrational longer than you can stay liquid. We'll see, things always look their worst at the bottom.

9:24 PM  

Post a Comment

<< Home