From the April 01, 2011 issue of Futures Magazine • Subscribe!

John Taylor: Growing up with forex

FM: What would that mean for the dollar?

JT: If we lose it, it will be a big deal, but we are not about to lose it. The problem with being a reserve currency is whenever things are good in the world your currency is going down. [And] when the world is doing [poorly] and there is no liquidity out there because that is what happens when the world is doing lousy, then you are worth more. So when the world goes into recession the dollar goes up; when the world is doing great the dollar goes down. That is the most important thing to know about foreign exchange nowadays – it is kind of backwards.

It didn’t used to be that way but it is that way now. So in 2008 all of a sudden the dollar was strong as a moose. Then when we solved the thing, the Fed printed enough money, the dollar started to weaken in March 2009. Then it started to strengthen again last April/May because they were talking about raising interest rates and slowing down the U.S. growth of money. The dollar was strong then until August when Jackson Hole comes out and [Bernanke] says ‘I am going to print tons more dollars,’ and back down the hole we go and the world grows. Now the Republicans are in there and they don’t want to print any more bucks so guess what, the dollar is going to go up again and the world is going to go down, so 2011 is going to be a big recessionary year.

FM: What would it take for more normal fundamentals to be back in play?

JT: For there not to be so many dollars floating around the world. I don’t think that normal fundamentals are coming back.

FM: You talked a little bit about the manipulation of central banks. How does it affect your trading?

JT: It hurts it. Sometimes we can anticipate it, but most of the time it comes out of the blue. It is a problem for us, but sometimes it works out ok. One of the reasons the carry trade works so well is that the central bank of Indonesia, for instance, says ‘I don’t have enough capital in this country so I have a high interest rate. I don’t let my currency bounce around. I intervene, buying and selling to make sure it is nice and smooth.’ I love the central banks when they are doing that. But then all of a sudden they will say ‘it is much too high, I don’t need any capital, I don’t want it anymore, so I am going to drive it away.’ Then we get screwed. The carry trade is great often because all the emerging countries’ central banks are saying ‘I know how to get capital in here; I just have a high interest rate and I don’t let my currency [mess] around.’ So sometimes the central banks are ok.

FM: Is the level of manipulation more or less now?

JT: The same. It depends on what they want. Right now they have too much capital so it looks like they are intervening a lot because they are changing their mind. But if the world goes into a recession, they will flip to the other side. They are always there; it is just trying to win the game.

FM: Do you consider what the Fed is doing manipulation?

JT: It is but we do a poor job of it. It is very hard because we have so much money out there. We have to manipulate all of the money that is no longer in the United States. Our banking system is wide open, which makes it hard to do. It is much harder for the U.S. to manipulate its currency. You have to have a lot more controls than we have to get the job done.

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