Tuesday, Feb 10, 2009
The race to the bottom in currencies
MoneyWeek: The race to the bottom in currencies
Recent action on the forex markets has been perverse. The lower a central bank's interest rate, the better it was for its currency.
Posted by damien @ 02:27 PM (591 views) Add Comment
4 Comments
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1. flashman said...
There is hardly a shred of truth in this article.
1. The Euro did not fall because the ECB didn't reduce its' rates. It fell because the ECB admitted that they needed to reduce them by 0.5% ... but wouldn't get round to it until next time. Failing to take action that has been admitted as being necessary never plays well with the markets. However far worse was the perception by currency traders that this failure was caused by German pressure. Germany is terrified that it will have to ultimately pick up the tab for poorer EC states. It is after all still deeply scared by the tab for East Germany. More than anything the fall in the Euro was caused by a realisation that the ECB is not as free to act as a central bank that only has one country to consider
2. The Dollar did not rise because the FED reduced interest rates. It rose because of a global unwind of leverage/risk, and the resultant repatriation of US Dollars from emerging markets. It also rose because general panic caused a flight to the worlds' reserve currency
3. The Yen did not rise because they reduced interest rates. It rose because of the reversal of the decade long carry trade
4. The idea that there will be a 'speculative attack by currency traders looking to get even' is preposterous. The concept of revenge in trading is just plain silly. Revenge against who? For what? Traders make money out of movement. Only hedgers lost and they don't care becuase the other sideof the hedge won.
Please don't slam me for being anti this or against that. I am just giving a flat report of what currency traders actually think. I was a little astonished that this guy wrote all this stuff without actually bothering to speak to any currency traders. Or maybe he is just selling something?
2. inbreda said...
It's the first article I have read that has made me think I should get out of gold. Such a fact-lacking vested interest article that I am now scared of the gold bubble.
3. mountain goat said...
Flashman - yes I really got confused reading this. If he meant to write it in irony he should have made it more clear that he was doing that. He is a smart guy, I usually enjoy his articles and am used to him slamming fiat currency; after all he does work for BullionVault. Poor article from him this time.
Still, it is weird how there seems to be this global short-term correlation between falling interest rates and appreciating currency. Perhaps it can all be explained by individual reasons as you mention above.
4. bellwether said...
Flashman, sterling crashed this afternoon against just about everything but particularly the Yen and USD. I'm seeing that linked to the crash in financials and the UK being seen as one big financial. The down was particularly brutal 4% against the yen at 1 point and seems to have momentum. Any thoughts on where sterling is heading over the next few?