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Jay Currie

One Damn Thing After Another









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6/04/2005

I have to say I don't like currency trading at all, whether done by central banks or by private traders. In an ideal world the only currency trading would be for actual trade purposes (including hedging for trade but not hedging for speculation). Since you list Jane Jacobs "City and the Wealth of Nations" as one of your five most influential books, you know why I prefer such a situation.

But certainly the current situation, where currency prices are driven, for years, by central bank purchases and by speculative money which is mostly pretty hot, gives feedback to economies (and governments) which is inappropriate and not in their best interest. Bear in mind, for most of the last four years about 80% of the free savings in the world were plunging into the US, not because the US offered higher returns (it didn't) but because a number of central banks (most notably the Japanese and Chinese but not limited to them) made a decision to support the dollar because they didn't want the free market consequences of what would happen if the dollar collapsed under the weight of its twin deficits.
ian welsh, tilting at windmills
Ian and I have been having a discussion about just how free currency markets are. In itself it is an interesting conversation; but it is also a rather good example of how people can disagree because they understand ideas in quite different ways.

I firmly believe that currencies are priced by a market mechanism. A mechanism which prices in such things as the strange behaviour of central bankers. But, then again, I don't actually think there are independently verifiable "economic fundamentals". There is, in my view, no such animal as a correctly priced currency. That is a currency which conforms to a price which the economic performance, trade statitistics, monetary policy and fiscal inclinations of a nation would suggest.

In fact, the markets in currency reflect the fact that such an economically correct price is an impossibility because of the uncertainties involved.

Those uncertainties range from the simple fact that there is a significant lag in the reporting of economic statistics to the more complicated fact that internal and international politics can cause fluctuations in price which have nothing to do with the underlying economy.

At best, a currency price is a guess, a bet, on a certain view of the current and future prospects of that currency relative to all of the other currencies it trades against. There is no right number from an economic perspective; but there are a range of profitable numbers for currency traders.