November 9, 2004
The Coming Dollar Collapse?
Around the web several pundits are acting as if an eminent dollar collapse is all but a certainty. At Tilting at Windmills for example a post states:
- The U.S. dollar is overvalued and therefore likely to fall.
- This decline is estimated to be about 30% over the next year. This is more than enough to wipe out any gains my funds might make in the stock market over that time.
- The weakness of the dollar is becoming common knowledge.
- Europe and China seem unwilling to intervene. We'll know soon if the Japanese are willing to do so.
Now, I'm not going to try to pretend that I know where the dollar is going, but if this is true there is sure a lot of money to be made. Here are the Euro FX Futures trading on the Chicago Mercantile Exchange:
What this is saying is, right now, the markets look for a very slight decline but still have the dollar hovering around its current exchange rate of 1.29 $/Euro. If you click through to the site, the Japanese Yen futures are trading around 103 Yen/$ a year out. This is down from the current exchange rate of 106 Yen/$, but not a 30% drop.
Can the futures be wrong? Yep. In fact they are all the time. But if they are wrong, everyone so sure that the dollar will collapse can make money hand over fist if their beliefs are correct. If they think the collapse is going to happen over the next 6 months they can buy call options on the futures and make even more.
The point being that while the dollar collapse may be "common knowledge" in certain circles, it's far from crystal clear.
Posted by Peter Mork at 6:26 PM | Comments | TrackBack
September 28, 2004
Moving at the Speed of Currency
How much money is changing hands between counties? The Financial Times reports today:
Trading on the world's foreign exchange markets has leapt to a record $1,900bn a day, driven by renewed interest in currencies as an asset class and the return of hedge funds specialising in currency bets.
To put that in perspective, using that daily figure the market value of foreign currency transactions in one week is greater than the market value of the Gross Domestic Product of the U.S. for the entire year. When that much money can move that quickly, it is a clear sign the Forex markets are efficient.