Okay, so some say there is a carry trade, some say there isn’t. Some say the dollar movement proves there is, some say the federal reserve statistics show there isn’t. Some say that the only ones able to perpetrate this are the primary dealers, some blame foreign entities for massively shorting the dollar (there are a few non-american primary dealers though). All that aside, here is something to watch for (HT@ZeroHedge) :
Representative Alan Grayson is an idiot in his vocal support for the health-care bill, but has sound opinions on monetary policy. ZeroHedge has been investigating the dollar currency swaps, which indicated that there was a massive dollar shortage among european banks, and the currency swaps were in fact bailouts for them. If this is true, that means that the currency swaps acted to keep the dollar from going through the stratosphere as everyone scrambled to cover shorts. However – this seems to indicate that the winding down of these dollar swaps has had the exact opposite effect on the dollar, namely keeping it from falling through the floor. These currency swaps are now down to almost 0 (give or take a few dozen billions or so), but as ZeroHedge points out, there may again be a dollar-funding shortage of up to $6 trillion….
I am having some slight troubles with the ZeroHedge analysis on this one – but they are by all probability at least partly right. It’s easier to short the dollar if you know you can rely on the US Federal Reserve to have your back if you need to cover your bets. But I think there are more factors in play this time. For instance – there is a gazillion in excess reserves that I’m sure some banks would be willing to lend out if there was a need to suddenly cover dollar shorts, so that the forex markets weren’t completely choked. I’m also thinking that there has to be a lot of large dollar players taking every short pullback from the decline as an opportunity to dump dollars. Just look every time the dollar tries to consolidate.
Anyways, I’m not very good at these things, but it’s definitively worth a heads up on this amendment.