What Really Makes the Dollar Move?

by: David Andrew Taylor

I get asked the question all the time: what moves the currency markets? I also get crass comments from individuals who think they know a thing or two about currencies because they read something on Yahoo, but in fact do nothing more than run a hypothetical mutual fund.

There are some out there who are dead positive that just because we have a trade deficit, the dollar is set for a total collapse. I'm getting a little bored hearing their arguments, because they carry about as much weight as a Landis argument for being clean in Stage 17. Warren Buffett made the mistake of thinking the trade deficit was going to force the dollar to collapse. He ended up having to explain to a large roomful of investors why he made the very largest mistake of his career and took one of his only losses ever. The only thing that moved the U.S. dollar was the interest rate differentials and a whole bunch of investors making an exit for the door when the great bull market rally in equities was over, not the movement of funds for goods purchased from overseas.

The dollar does not move because of a trade imbalance. The dollar moves for one reason and one reason only: Greed. There are two kinds of trades being placed every single day in the currency markets: A trade to get more of what you have, and a trade based on keeping more of what you already have. You can kid yourself all day long and tell me that you play this game for the love of the game. Bullshit. Participants play this game because of greed. We wake up every morning with smiles on our faces because there is an opportunity to make a trade. With that opportunity is the potential to make money to satisfy our greed.

When interest rate differentials fell out of favor for the U.S., the dollar fell lower. When the opportunity for individuals to make a higher rate of interest no longer existed here in the States, they took their money and moved it back overseas. The dollar moved lower because of that reason, not because we bought too much from overseas. The greedy saw the music turn off and the lights turn on when the officials showed up at the door. They promptly left the party.

There was a trade imbalance prior to the dollar's fall in 2001. There is still a trade imbalance. So that argument is losing weight. Oh, I see... It's a bigger trade imbalance now, so it matters more this time. Whatever.

You think the trade balance has anything to do with movements in the value of the dollar? Really... there was -$65 billion flowing out of the U.S. for trinkets made in China. The month before... the same thing. Before that and for just about every month prior for the past year was exactly the same thing. And during that time, did the dollar collapse like you've been so sure of? Nope, and the strength of your argument is losing ground along with your account balance. Prior to the decline in the dollar in 2001, there was a trade imbalance. All the while, pundits dismissed it because there was so much money flowing into our bull market rally. So why is there a change in market sentiment now? Defies logic, really.

Thing is, you're probably going off of something you saw on TV. And all the while, the dollar doesn't collapse and there is still -$65 billion flowing out. Has it occurred to you yet that you're missing something huge? You're not still placing that bet, are you? Because I'm still making money off of the dollar not falling. I got one star for a post because for that day, my trade worked out. News flash, pal: That trade has been working out for me months now. So, you can take your generous one star and shove it. In the meantime, I'll keep taking your rookie money all day long. Thanks for being ignorant.

You want to know what is going to move the currency markets from here? Just ask yourself in what direction would greed be moving. We have the second highest interest rates in the world. The good folks in Asia are sitting on 0.25% interest rates. You think they really want to earn that kind of interest when they could be earning over 20x as much interest here in the States? They are the greed that moves the currency markets. Their money will be flowing in to the countries with the best opportunity to make them money. And all the while, the currency of that country will be going higher.

In this world of trading, not only must you be dead-on-balls right, but you better be greedier than any other market participant out there. I'm not talking about the kind of greed that Hollywood script writers pen when they say "Greed clarifies". Greed doesn't clarify anything... Greed motivates. I'm talking about the kind of greed that pushes you to know more than the collective market, the very competition you do battle with every morning. The kind of greed that moves you to jump all over a market that is pushing in the direction that you expected. The kind of greed that also gets you out of the markets when the move is done.

You need to be greedier than any one of the thousands of participants that step up to the plate every morning... ready to take away your entire account balance the moment you flinch. Greed that keeps you out of a market that you have no business being in. Greed that keeps you up all night trying to figure the next move in the markets. If not, I'll be the one cleaning out your account balance. Because that is EXACTLY what I do best and EXACTLY what my investors pay me to do, and have thrown millions at me to do so.

So the next time you pony up to the plate and want to have a battle of wits with me... You better show up with more than just a hypothetical mutual fund club that you post on Yahoo, because you're not even in my league. You're not even in the game.