[lbo-talk] Forward selling of the dollar

[Michael Pollak]

My morning FT says that if foreigners hedge their positions by selling the
dollar forward it "runs the risk of creating a vicious cycle."  I'm trying
to figure out how.  I see how if everyone sells forward, the forward price
drops.  But I'm not sure I see how that causes the actual currency to
drop.  I mean, sometimes people are wrong and they lose money.  And
hedgees are presumably happy either way since it's supposed to balance
something else out.

I can imagine how the dollar could theoretically be driven down if people
were massively selling the currency short -- if they were taking short
term loans in dollars and exchanging them for Euros with the intention of
paying them back in cheaper dollars when the Euro fell.  If enough people
did that, then it would cause the dollar to fall in a way that would make
them all money.  But (aside from the cases of speculators getting burned
in the past doing this) I don't think that's got anything to do with
selling a forward contract on the currency, does it?  Or am I missing
a crucial link?

Michael