"Speculative traders in Chicago last week racked up the highest number of long-euro, short-dollar contracts on record. Options traders have reported brisk business in euro calls - contracts to buy the euro at a pre-determined rate.Hmmm....heavy US government spending both on the military and high-profile domestic projects, a shift in reserve asset allocation, plus a petro-dollar overhang. That would be all the historic signals for a major dollar realignment, no? It was exactly this cocktail that brought about the end of Bretton Woods and eventually the 1972 dollar float, and something like it caused the slide that had to be managed through the Plaza Accords.
However, the market has been rife with rumours that the latest wave of selling has been led by foreign governments seeking to cut their exposure to US assets. India and Russia have reportedly been selling US assets, as well as petrodollar-rich Middle Eastern investors.
China, which has $515bn of reserves, was also said to be selling dollars and buying Asian currencies in readiness to switch the renminbi's dollar peg to a basket arrangement, something Chinese officials have increasingly hinted at. Any re-allocation could push the dollar sharply lower and Treasury yields markedly higher."
So - what does that suggest the "it" was?
Update!: It is reported that the rouble - I'm tempted to say "even" - surged against the dollar yesterday despite Russian Central Bank intervention to back the $. (Details here) What the Russians are trying to do is to avoid a common problem for resource exporting economies, the "Dutch disease". The problem is that although oil exports produce a spectacular trade surplus, the exchange rate soars. This squashes other export industries and sucks in cheap imports, damaging others. One option is to run an exchange rate targeting policy. After all, a central bank can always intervene downwards. Note, though, that the RCB is apparently cutting down its intervention - "Central Bank gold and forex reserves in the week ending Oct. 29 rose $2.1 billion to $107.3 billion, a much smaller rise than the record $5.1 billion jump the previous week, reflecting less dollar-buying intervention." There's no point being left with a mound of paper.