Currency Traders: The Fed Has No Clothes! Part 3

04/23/2008 12:00 am EST


Timothy Morge


 (Or, in other words: What’s Going To Happen With the US Dollar?)

I told him I honestly didn’t know what they were going to do, but my position should tell him where I thought the dollar was headed. We walked out back to the trading desk together and watched as the rest of the senior traders started to build short US dollar positions against their own currencies. I asked him if he was going to sell any dollars. He just laughed and told me he had been limit short since I started selling Monday and he had started selling more this morning after his mate in London called. He already had a nice sized short position.

Near the end of the trading day, we got a call from a friend that traded at a Swiss bank. His name was Bernie and when Bernie called and told us he was ‘on maneuvers for the Swiss Army,’ that was his way of saying that he was dealing because he had ‘inside information’. He didn’t tell us anything other than that he was ‘on maneuvers’ and then asked for a price. He sold US$ 5 million to us so we would know he was bearish on the US dollar against the German Marks. To all of us that had been around and seen Bernie operate right before ‘official’ announcements’ or surprise government actions and laughed at his rumors, only to see he generally took positions right before abnormally large moves occurred, Bernie’s call was the final confirmation: If Bernie was calling, something official was likely to be announced soon.

After the US stock market closed that afternoon, the rumors began to get specific: there was going to be a meeting of all the key central banks in New York this coming weekend and they were going to make a major announcement concerning the dollar. There was no official confirmation, but the rumors were now persistent and we saw a steady flow of selling by customers that usually had inside information.

There was very little for me to do at this point. I had been short dollars since Monday morning and had added at every opportunity. I was as short as I wanted to be and at a price that was well above where the cash market was currently trading in both the German Mark and the Japanese yen. And I had finished building the bank’s short US dollar position the day before; it, too, already had a tremendous profit in it. But if these rumors proved to be true, the current profits would be small change after the weekend.

Later that evening, there was official confirmation that the world’s largest central bankers would be meeting in New York and they expected to release a communiqué after the meeting’s conclusion concerning a new coordinated economic policy, particularly targeting the value of the US dollar.

Although the US dollar continued to slip against the major currencies the rest of the week, the official announcement that there was going to be a meeting in New York by the world’s central banks seemed to take some of the frenzy out of the markets. A sort of eerie calm settled over currency markets and the volume going through the markets on both Thursday and Friday was much less than the volume on Monday, Tuesday and Wednesday. On our currency desk, our traders all had their positions, and because their positions were at much better averages than the current rate, there was little stress or pressure on them; the traders had all settled in to wait for weekend’s announcement and its implications.

The details of the Plaza Accord came out over the weekend, with a spokesman from each of the G-5 countries presenting their own statement. The focus of the coordinated policies was indeed the value of the US dollar. Now we all waited for the Asian markets to open, to see what effects the statements would have on the currency markets and whether the central banks would match their words with actions.

The cash currency markets open with trading in New Zealand and Australia at roughly 3 pm Sunday afternoon in Chicago. The central banks of both of these countries openly sold US dollars aggressively against the major currencies on the open and announced that they were actively intervening to lower the value of the dollar—something that was unprecedented.  Those traders that didn’t believe the rumors of an important central bank meeting and change in policy going into the past weekend were now believers and tried to jump on the bandwagon by aggressively selling US dollars against the major currencies.

When the Japanese markets opened, the Bank of Japan [‘BOJ’] aggressively sold US dollars against the yen and also sold dollars against the German Marks—and following the lead of the Australian and New Zealand central banks, the BOJ made press announcements with each fresh round of coordinated sales of US dollars. As the markets opened one by one, the rate of decline of the dollar accelerated, as more and more traders tried to chase the trend.

There were similar rounds of fresh selling throughout the night and announcements each time by the central banks involved. It was obvious they wanted the most ‘bang for their buck’ and they were intervening as noisily as possible, hoping to draw in more and more sellers of dollars.  And of course, the dollar was in a literal free fall for days.

The handful of traders that got the visits from the Finance Ministers on Monday and Tuesday were unofficially told later that the strategy had been to identify four or five major traders and make certain they were interested in creating large short US dollar positions early in the week. They then hoped that at least some of these traders would clue in a few of their larger clients or contacts once they had built their own sizeable short US dollar positions. And of course, human nature being what it is, these contacts or clients would then tell others and the message would then rather quickly become disseminated. Looking back on that week, the central banks were alarmed early on because the traders they had chosen didn’t do much talking—it became clear early on they’d have to make a few phone calls and do a little leaking themselves, and so they called the second tier central bank traders and gave them just enough information to get them initiating new short US dollar positions. And it was this activity that ultimately started the rumors that continued to build all week long.

More in part 4…

By Timothy Morge

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