Position fatigue prompting short-term dollar rethink

September 28, 2009

– Neal Kimberley is an FX market analyst for Reuters. The opinions expressed are his own –

Dollar bears have been disappointed by the G20.

Talk of re-balancing remained just talk; the bears can discern nothing substantial. Some risk is being taken off and dollars bought back selectively. While the dollar’s general downtrend is intact, there are risks of a temporary reversal, with some seeing the euro temporarily back to $1.4500/50.

Traders can contrast G20 with the Plaza Accord in 1985 which was driven by U.S. Treasury Secretary James Baker’s persistence. But he only had to convince four peers. G20 is and will be a different story. Dealing with the G20 must be like herding cats.

Disappointment over G20 has come at an inauspicious moment. Extensive short dollar foreign exchange positions have been underpinned by the unparalleled provision of dollar liquidity by the world’s central banks.

The market has used that dollar liquidity to fund purchases of other currencies and assets. Currency speculators raised their bets against the dollar in the latest week to the most since March, 2008, data from the Commodity Futures Trading Commission on Friday showed.

But the market is realising that the major central banks are contemplating the initial steps in their exit strategies, which would naturally reverse the dollar-funded carry trade.

The liquidity bonanza that has ignited the asset market rallies is going to be pared back. Last week’s withdrawal of some emergency facilities that are deemed to be no longer needed was the first step.

Federal Reserve Governor Kevin Warsh added fuel to the fire asserting “policy likely will need to begin normalisation before it is obvious that it is necessary, possibly with greater force than is customary”.

Seemingly Warsh is not expecting the “softly softly” approach of former Fed Chairman Alan Greenspan in his post-dot com bust tightening cycle that started in mid-2004 and lasted for two years.

Market players who are using the dollar as a carry currency will note Warsh’s comments and may trim back their short dollar positioning.

The yen’s strengthening to 88.23 yen against the dollar today should be seen in the same context, as a trimming back in carry trades by Japanese retail investors, who by and large remain wedded to the U.S. currency.

The market will ultimately want to target the year’s low of 87.15 yen and ultimately the all-time low of 79.80 yen, seeking to tempt Japan’s Ministry of Finance into a reaction.

In an atmosphere where the new Japanese government seems somewhat indifferent to yen appreciation, the market has delivered general yen strength. The headlines focused on dollar/yen but traders reveal that much of the emphasis was on the liquidation of cross yen trades such as euro/yen.

Risk trades have buoyed equity markets as well as fuelling short dollar positions on the foreign exchanges. Risk trades are predicated on the assumption that government economic stimuli will promote self-sustaining recoveries. If that assumption is faulty, then the positions will need some unwinding.

However, traders are now realising that programmes like “cash for clunkers” are merely cannibalising future purchases. Consumers will respond to incentives, but without those incentives they prefer thrift. Lengthening job queues are keeping purse strings tight.

There is therefore a growing belief that the dollar may find passing strength as positioning is adjusted, which traders would see as an opportunity. Proprietorial traders will welcome the unwind and look to take advantage of any such move. Their longer-term view of further dollar weakness is undimmed.

The U.S. national interest remains focused on re-balancing. The exclusion of Mexican trucks from U.S. roads and the imposition of tariffs on cheap Chinese tyres may be dismissed as sops to President Obama’s union backers.

Yet they betray a wider agenda to revive American industrial activity. A lower dollar, even if that hasn’t worked in the past, will be an integral part of that re-balancing act.

While the dollar may therefore draw some transient strength from position adjustment, dollar bears will see the euro around $1.4500 as opportunities to buy the single currency. Moves above $1.5000 are still envisaged.

6 comments

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The best thing we can do for restoring stability in the dollar and the economy is the audit the federal reserve and move off a fiat currency.

End the Fed!

Posted by Orgizmo | Report as abusive

When put in perspective,two main factors appear to explain the gradual demise of the USD:1)-August 15,1971 when President Richard Nixon took the unilateral decision to abandon the convertibility of the USD to gold.The gold-exchange-standard, imperfect as it was, imposed nevertheless some discipline, as balance-of-payments deficits were to be settled in gold.2)- The second factor is an historical constant: the fall of empires is due above all to their overextension. Fighting to sustain them leads to disintegration as it becomes financially impossible to support the various military,economic acions needed to keep them. This was true of the roman empire,the nazi,the soviet,the british or the french. The difficulty to continue to support the cost of the vietnam war was the original reason why R.Nixon took that decision.

Posted by CLEMENT | Report as abusive

The long term solution to global imbalances will be a Single Global Currency, managed by a Global Central Bank within a Global Monetary Union.
If the world is lucky and plans ahead, we will avoid a major currency crisis. When such a currency supports countries with 40-50% of the world’s GDP, that currency will become the defacto Single Global Currency, and the
“tipping point” momentum will favor its continued growth, until it supports all the countries of the world. Thus will come the Single Global Currency managed
by a Global Central Bank within a Global Monetary Union, and the benefits can be measured in the trillions, annually.
Such a Single Global Currency will provide what the people of the world want – stable money.
The primary problem for the euro and every regional monetary union today is that they must still exist in the multicurrency world where the value of its currency will fluctuate against other currencies.
If 16 countries can use the same currency, why not the 192 U.N. members? Those 192 countries now use 141 currencies and the number is dropping annually. The euro is definitely a harbinger of the future, and soon all 25 EU members will be part of the EMU, and by then, there will be more EU members to add. Several of the remaining non-euro EU members are now seeking admission as soon as possible. The IMF has even urged several EU members to “euroize” even before completing the standard
accession process.
In addition to eliminating currency fluctuations, the use of a Single Global Currency would eliminate the current foreign exchange trading expense of $400 billion annually, eliminate currency risk, eliminate current account imbalances, eliminate the need for foreign exchange reserves (now totaling more than $6 trillion); and bring other benefits worth trillions, such as reducing the impact of global financial turmoil such as we are now experiencing.
The Single Global Currency Assn. (www.singleglobalcurrency.org) promotes the implementation of a Single Global Currency by 2024, the 80th anniversary of the 1944 conference.
The world is moving toward a Single Global Currency through the creation, expansion and merger of regional monetary unions. Other routes are through “ization” (as in “dollarization”and “euroization”) and international monetary conferences proposals and agreements, such
as were seen at Bretton Woods. The merger of the
eurozone with one or two other currencies is one possible route to a Single Global Currency.
The challenge now is to reach that goal deliberately, as soon as possible, with as little cost and as few crises as possible. If the eurozone were to merge with the U.S. dollar of the yen, or if the yen and the U.S. dollar were to form a monetary union, the road to a Single Global Currency would be clear.
The only remaining questions about implementation of a Single Global Currency are: when? and how much cost and turmoil will the world endure before that implementation.
See the book, “The Single Global Currency – Common Cents for the World.”
Morrison Bonpasse
Single Global Currency Assn.
Newcastle, Maine, United States

The G20 granted the framework of realignment of currencies to the IMF so 186 countries can realign.

There is an annual meeting of the IMF for two weeks now in Istanbul so we may expect some headlines on this going into October 7th.

Posted by GIL | Report as abusive

Gil, when has any action by the G7, G8, G20…. ever benefitedthe economic health of the rest of the world?

Economic well being through out Africa, the Middle East and much of South America has declined in the past forty years. Multinational corporations with the assistance of the G20, it’s predecessors and western governments have negotiated favorable trade agreements concerning only the bottom line of said corporations. In the meantime water wells have been sucked dry, fisheries over fished to extinction and mineral wealth robbed from the poor countries of the world making them even poorer. All by foreign nations, not the natives.

Morrisson, we had a world currency. The Breton Woods agreement or gold standard, a fixed exchange rate.The poor countries of the world were lifting them selves up from world war II right through the late 1960s. Richard Nixon ended all of that when he canceled the Breton Woods agreement in 1970. Something to do with the cost of the Viet Nam war? We can talk about repealing Glass/ Steagall and other important Depression Era finance legislation another day.

Posted by Anubis | Report as abusive

I second that Anubis ! Add the air that was destroyed in the process too. See also for gold holdings, mind the double counting:

http://en.wikipedia.org/wiki/Official_go ld_reserves

The irony is that the largest producers own very little of their own gold.

Posted by ANON | Report as abusive

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