Forex Investment and Currency Trading

The US dollar continues to appreciate despite a malaise of horrific US news and has left many confused. There is some information that may help explain. To give you a sense of the size, total US dollar holdings of foreign central banks totals roughly $7.0 trillion US dollars while the size of US managed assets is between $25-30 trillion US dollars, essentially 3x the size. US managed assets are currently extremely overweight international equity and/or debt asset allocation. 

The US Funds are being forced to deleverge their positions for several reasons: 1) poor performance in US equity investments is forcing funds to take profit on other positions to offset the realized losses which has led clients to sell commodities and exit carry trades.  2) poor performance in Asian equity investments (Korea, China, India) has led investors to call for redemptions which has only catapulted additional selling as funds move to generate enough cash…think about the 40,000 jobs on Wall Street that have been lost this year, who are generally the primary investors in these types of exotic funds, they need cash and are selling their portfolios to generate it.  3) lack of funding / ability to borrow at attractive levels is forcing deleverging.  Funds recognize that right now is not the time to borrow big and bet big unless your goal is to lose big, scaling back of these overall positions and bringing cash home.

In the end, even if the money managers are not changing their allocations and just reducing overall risk, that still leads to systematic selling of a more international equities and debt products since everyone is overweight the international side.  As these funds scramble to find enough US dollars, to ensure they can wade through the bankruptcy mess with LEH and who knows who else, the basic flow of funds is US dollar positive.  Given the sheer size of US managed assets, those flow of funds is quite substantial…: 30yr US Treasuries fell to 3.97%, their lowest yield in 45 years.  2yr and 10yr Treasuries have are not far behind.  CASH IS KING!