Tuesday February 22, 2005 - 11:17:23 GMT
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Black Swan Capital - www.blackswantrading.com
Dollar dumped on reserve perception
“In reality the market puts us in a contest with ourselves. Until we let go of the false ideas of what makes the market tick and simply respond as the market unfolds, we will continue to be punished.”
Edward Toppel, Zen in the Markets
Bank of Korea comments appears the culprit for the dollar dumping, according to reports. These added rationales are from Bloomberg this morning:
Almost 70 percent of the 56 central banks surveyed said they increased exposure to the 12-nation currency, according to the survey conducted by Central Banking Publications Ltd., a London- based publisher, between September and December 2004. Fifty-two percent said they reduced exposure to the dollar.
George Soros, the billionaire investor, said central banks of oil-exporting countries in the Middle East, along with Russia, are diversifying out of the dollar and spurring the currency's decline, Reuters reported yesterday.
U.S. Treasuries were the second-worst performing major government market in the world last year, returning 3.5 percent to investors, according to Merrill Lynch & Co. indexes. Only Japanese bonds, which returned 1.3 percent, did worse among the world's largest government bond markets.
Though I have seen it many times before, it still amazes me how quickly a price move can be rationalized. But it goes to the point just how quickly sentiment can swing in this market with news at the margin. What I mean by that is, we have been hearing the stories of central bank dollar reserve allocation for a while—why does the Korean Bank news become the catalyst?
We could argue till the cows come home as to whether the Korean Bank news IS really going to change the reserve dynamic. I saw this note from Morgan Stanley economist Stephen Jen yesterday:
“Chairman Greenspan suggested talk of a diversification trend by foreign investors out of US assets may not be correct. In a recent note we found that, based on the aggregate global data we can find, there is no proof that the USD share of global reserves has actually declined in the past year. In fact, the data we could find suggest otherwise.”
Mr. Jen, I might add, has proven to be right many times with his out of consensus views. He has been excellent over time. Hindsight will tell us if he is right again this time.
But in trading, to paraphrase the late great Jesse Livermore, it is better to DO right than BE right.
On a weekly basis, the dollar index looks increasingly like another test of the lows could be in the cards:
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