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Free Post: The “Greater Fool” on the Dollar Short Trade Revealed

You know the saying. Those who buy the “hot trend” do so eventually hoping to sell to the greater fool. In the case of the dollar trade, the greater fool would be the last guy to short it before the rebound.

If you remember “Davidson” has submitted a few posts on the dollar. Read them here and here. For those who wish not to read them, he essentially was saying that the dollar had most likely bottomed and was due for a rebound.

Then this from Barron’s:

At least Chavez didn’t have to worry about ponying up the bucks to pay for his Big Apple junket. His government was issuing some $3 billion in dollar bonds, split even between a 10-year maturity expected to carry a 7.75% coupon and a 15-year maturity with an expected 8.25% coupon. So, he’ll have plenty of greenbacks for his hotel bill, including whatever he got from the minibar.

The bond issue was designed to provide dollars to meet the demand for greenbacks among Venezuelans who, for some reason, would rather have dollar assets than their own bolivars. And the deal was working. Dow Jones Newswires reports from Caracas that the bolivar is up 25% from its August low, at 5.2 to the dollar in the “parallel” market, versus 7 to the buck a month or so ago, when greenbacks were scarce.

Venezuela thus joins the parade of foreign borrowers issuing bonds denominated in dollars. That means they’re expecting to pay back those debts in devalued dollars.

As noted in this space previously, borrowing dollars to put to work elsewhere at higher yields is an example of global carry trade. And that effectively is a short sale of dollars, a bet on their decline.

The dollar-carry trade has been gathering steam since it was written about here months ago (“Money for Nothing and Bucks for Free,” June 5,.) Earlier this month, Germany confirmed it would borrow in dollars to produce “savings for the federal budget,” which would result from the currency gain generated by the dollar’s decline.

Germany was followed by a flood of other offshore borrowers, from Abu Dhabi’s national energy company to Sweden’s Export Credit Corp to Hong Kong’s Hutchinson Whampoa, all eager to borrow and repay in ever-depreciating dollars. Now, comes Hugo Chavez and Venezuela jumping on the bandwagon, borrowing and thus shorting the greenback.

“That to me is a sign the short-U.S. dollar trade is ripe for a reversal, when basically the biggest idiot in the house is short,” writes Nic Lenoir of ICAP,

This may just be the clearest sign of a bottom there could ever be……