Joseph Trevisani submits:

In all the anguish over the recent decline of the dollar, two simple facts seem to have become misplaced.

  1. A very large amount of the day to day positions in the currency markets and thus the negative movement in the dollar is the result of traders chasing profits. It is obvious but worthwhile to state again that these are trading markets and trading markets are all about trading profits. Currency markets are not designed, at least in their day to day valuation, to make judgments about the viability of a currency’s reserve status.
  2. As soon as the Fed signals that its easy money policy is at an end a great percentage of those traders who are now avid dollar shorts will reverse and become with equal sincerity dollar longs. New punters who see profit potential in long dollar positions will soon join the ex-shorts as the Fed begins a rate cycle that might last two years and bring the Fed Funds rate back to historical norms. The dollar will follow the funds rate higher.

The world’s disenchantment with the dollar as reserve currency is new. Only eight months ago the dollar was all the rage. The world fled to the dollar and dollar assets as global financial markets imploded. If another crisis struck tomorrow it is unlikely that the world seek financial refuge in a different national script and government? The current trading equation of risk and reward is a dollar based concept; as risk rises so does the value of the dollar. This logic remains true. If this aspect of the dollar’s place in the world economic system has not really changed what then are the motivations and logic of the critics of the dollar’s reserve status?

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