Monday January 24, 2005 - 11:34:09 GMT
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Black Swan Capital - www.blackswantrading.com
The big story on the dollar?
“I never think of the future. It comes soon enough."
The big story on the wires this morning is that central bank managers had increased their exposure to the euro over the past two years. Well, now we know. But as we look at the dollar index chart over the past two years, we probably should have suspected something of that magnitude.
US$ Index Chart
I think the big story falls into the category of “no surprise.” The question is: Will central banks and every other dollar haters (a stubborn crowd that sees no reason to switch sides as of yet) continue to sell dollars? As you can see, the bounce in the buck so far this year is just that—only a bounce when considered into the 2-year downtrend.
We know the rationales and the potential rationales:
• Yield differential improving for the buck
• Relative US economic growth
• A crystallized sentiment extreme against the dollar
• The possibility of the Bush Administration put action behind “strong dollar policy” words
• An emerging view that a falling dollar won’t solve the current account problem
We have noticed the crowd warming to some of these rationales as the dollar rises (conversion flow). “Expectations about future exchange rates constitute the main motivation in speculative capital flow,” said Soros. Are the expectations influencing the fundamentals? The short answer is “yes.” But, there is always a test of any new rationale. It’s the way it is and has to be.
As the dollar corrects or retraces or consolidates its gains year-to-date, the old rationale will be back in vogue. Based on the price action Friday; that process may be underway. And the big story from this morning will be used as supporting evidence as a dollar correction unfolds. The bears will talk their positions and once again tell us a story about the deficits that we all know by heart.
But as we focus on these events within our trading time frames (short-term), it doesn’t matter who is right. What matters is that we do right, to paraphrase Mr. Livermore. And at this stage that means playing for a dollar correction. But for intermediate-term player it may mean doing nothing. Because until there’s a better reason to sell the buck than one that tells us what central bank managers HAD done over the past two years, I’m sticking to the new story.
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