Last year the story was all about diversifying away from the dollar.
China engaged in a major project to diversify reserves, and many banks started purchasing euros.
The conventional wisdom of course was that the dollar would be toast.
But as Dennis Gartman points out in his latest letter, suddenly all these central banks are starting to doubt that decision, because if there’s one currency in the world that looks like it could collapse right now, it’s unquestionably the euro.
Simply put, if you are the Reserve Bank of India, or the
People’s Bank of China, or the Reserve Bank of
Russia and you have been buying EURs over the past
five or six years as you tried to diversify your reserves
away from the US dollar and now you find the nations
whose currency you have been diversifying into is in
danger of breaking apart, what would you do? Would
you hold on and hope that what you are watching
happen right before your eyes stops and that your
worst nightmare does not come to fruition? Or would
you begin a hasty exit from as much as you can before
the door is slammed shut entirely and you are left
holding a rather large and very uncomfortable bag?
Our guess is that you use any minor bounces into
which to sell. You’ve really no choice. You might hope
you have a choice. You pray you have a choice, but
you fear that your choices are few and modest… and
so you saw the “bounce” in the EUR as an opportunity
to get less long of it and you issued the order to your
minions on the trading desk to “Sell… and sell what you
can. Am I clear?”