Editor’s Letter : Dear Reader

Place Your Bets

With corporate misbehavior and accounting shenanigans apparently under control, the focus of the conversations among the financial chattering classes has moved on. In fact, it has become a dual focuson the fall of the US dollar and on the rise of the hedge fund industry.

The two came together last month with speculation that hedge funds had been buying up US securities in such quantities that their purchases were reversing the downward trend of the dollar. (See Milestones) At first glance, that seems a pretty strange thing to do, given that hedge funds are more likely to want the dollar to fall further so they can ride it down. Currency markets had already been seriously rattled by reports that Asias central bankers were starting to diversify their banks holdings away from dollars, but the revelation of the near-$40 billion purchases helped reassure the markets that the dollar wasnt about to fall off a cliffand marked the start of a 10-day dollar rally.

It is not easy to see how hedge funds could benefit from propping up the value of the dollar, but there are some intriguing echoes of 1992. That was the year that George Soros catapulted hedge funds into the limelight with his raid on Sterling that forced Britains currency out of the European Exchange Rate Mechanismand left the Bank of England out of pocket by about a billion pounds. Soros, who believed Britains currency was significantly overvalued, had a simple strategy: borrow billions in Sterling and then use it to buy Deutschmarks and French francs. The selling pressure forced the British to give up defending the pound, which then plummeted, leaving Soros with his gargantuan profit.

By temporarily pumping up the value of the dollar, hedge funds and currency speculators could be setting the stage for the mother of all currency raids. If they are, and they pull the plug any time soon, the effects will be dramatic and painful. Any organizations that have not yet hedged their exposure to the dollar would be wise to remember that it is not only the Alan Greenspans of this world who can move the markets.

Expanded Emerging Markets Coverage

On Emerging Markets of this issue youll find a new section: EM Investor. covering subjects of interest to investors looking to put their money into emerging markets. Were excited about our expanded emerging markets coverage and we hope you find it interesting and, most of all, useful.

Until next month,

Dan Keeler