Currency Trading Takes Off When Rumors Start Flying : Market: Dealers respond to tall tales about presidential health, armed invasions and a variety of half-truths. Those who ignore the latest reports do so at their peril.
Psssst. Tensions were building on the Korean Peninsula. North Korea had stymied U.S. efforts to get international inspectors into the North’s nuclear facilities.
Then, on June 9, came word the State Department had advised American citizens to leave South Korea. Had the dreaded showdown arrived? Would war erupt?
In sleek trading rooms at big banks and brokerages in New York and London, legions of currency dealers leaped into action. They barked buy and sell orders into phones, exchanging dollars, Japanese yen and German marks. In a few hours, small fortunes were made and lost. The U.S. currency, considered a safe haven in times of turmoil, surged against the yen.
Later, Washington denied that an advisory had been issued. The dollar went back down, to end the day unchanged.
So much for assumptions that traders at the big banks and brokerages that dominate the $1 trillion a day world currency market--whose activities influence the price of everything from cars to caviar--base their decisions on the sober stuff of government data, investment flows and trade balances.
They also respond to wild rumors about presidential health, armed invasions and a variety of more mundane half-truths.
Stories about the impending fall of a government tend to drive down a currency as investors worry about changes in policy that could affect their holdings; word of a likely interest-rate increase usually pushes a currency higher, since that makes many short-term investments more attractive.
It might seem absurd that unconfirmed scuttlebutt could influence such a serious business. But advances in telecommunications and computer technology over the past decade have transformed currency trading into a split-second affair. The same technology has made the transmission of news and other information instantaneous and ubiquitous.
Dealers who pause too long to ponder the veracity of a piece of news can quickly find themselves “stopped out”--forced to sell or buy to avoid bigger losses.
“The markets are very skittish, and they’re very global. The impact of rumors is greater than ever,” said economist and author Joel Kurtzman, a former editor of the Harvard Business Review. “Everyone has to act on imperfect information because the information travels so quickly.”
Ezra Zask, president of Ezra Zask Associates Inc., a Norfolk, Conn.-based money-management firm, likens the process of rumor development to “a kids’ game of telephone.”
“Often you start out with a bit of truth and by the fifth person it’s become a full-blown crisis.”
Said Zask, a fair number of rumors are deliberately planted in an effort to profit from the rise or decline of a currency. The most successful of these deal with an ongoing event or situation.
“Martians won’t go,” Zask said. “It has to be something in the air that people are already nervous about. When a crowd is nervous about something, sometimes it just needs a tweak to get it going.”
In the Reagan era, rumors about the septuagenarian president’s health routinely buffeted the dollar. Those haven’t been heard during the tenure of the youthful Bill Clinton, but the market’s been rife with fictitious tales about twists in the Whitewater affair.
North Korean nuclear bomb development and impending U.S. invasions of Haiti have been popular themes this year. The most effective tales concern matters that can’t be proved or disproved immediately, giving the rumormonger time to collect a profit. Or they hit on Friday afternoon, when few players are in the market and just a few trades can make exchange rates jump.
While high-profile tales of intrigue can shake the market for hours, the rumor mill mainly generates workaday white lies about interest-rate and monetary policies or the buying and selling activities of central banks.
On the same day of the purported Korean standoff, former Deputy Treasury Secretary Roger Altman was said to be preparing to tell business executives that Washington wanted to establish a 105-to-115 yen range for the dollar. That gave the dollar--then trading at about 104 yen--a short-lived boost.
Rumors sometimes provide an after-the-fact rationale for exchange rate movements that could simply be due to technical trading--dealers buying or selling at certain levels to lock in gains or limit losses--on a day when nothing else is happening.
On such occasions, Zask said, dealers might concoct stories about mysterious and powerful Middle Eastern sources whose trading activities make the dollar rise or fall. “It’s . . . like primitive tribes inventing outside influences to explain things that affect their societies.”
Where do the tall tales start?
“When we hear them, they’re often attributed to traders on the floor of the (Chicago) Mercantile Exchange,” said David De Rosa, a director at Swiss Bank Corp. “When they hear them, they’re probably attributed to the interbank foreign exchange market.”
According to Zask, “the people in the Chicago futures pits think of rumors as a tactical tool in money management. They think it’s legitimate to start a rumor if it helps their position. There’s less of that in the interbank market. But some banks . . . are known for being rumormongers.”
But market watchers say it’s becoming more difficult to play the rumor game, partly because so many rumors turn out to be duds.
“The winning edge comes from being the first on the block with information. But the market is becoming a bit less willing to throw money behind information because we’ve seen traders get burned over the past few years,” said Lisa Finstrom, senior currency analyst at Smith Barney Inc.
Still, dealers who ignore potentially big market-moving news do so at their peril, as illustrated in a story told by Hubert Pedroli, who manages Credit Suisse’s New York foreign exchange desk.
“When I heard Saddam Hussein invaded Kuwait, I thought that was another stupid rumor. I said, ‘Yeah, yeah’ and hung up the phone. After 20 minutes I thought, ‘What if it was true?’ So I called up the Middle East and found out it was true. The dollar was up four yen by then. I lost a pretty penny on that.”
