Fisher Investments Editorial Staff
Media Hype/Myths

A Crisis of Irony

By, 05/28/2010
Story Highlights:
  •  Late Wednesday afternoon, rumors swirled of China reducing holdings of euro-denominated debt, dampening a rally in the euro and equity markets.
  • By the time markets opened Thursday, Chinese officials had decisively quashed the rumor, contributing to a strong rally.
  • Just last June, markets pulled back on eerily similar headlines about foreign holdings of US debt.
  • For all the talk, little action developed then and little is likely now—highlighting the folly of investing based on rumor.


Rumors, fears, concerns, and worries masquerade as news frequently in headlines. Case in point, stocks and the euro rallied early Wednesday—only to peter out towards the end of the day when rumors of China diversifying away from euro-denominated debt emerged. Overnight, China's State Administration of Foreign Exchange (SAFE) and sovereign wealth fund quashed the rumor and stoked Thursday's sizeable market rally.

Rumors of China abandoning euros in favor of the greenback are thick with irony. Just last June, stocks were jolted by eerily similar talk about a dollar crisis—China, Brazil, India, and Russia called for notes issued by the International Monetary Fund to replace the dollar as the world's primary reserve currency, concerns about US monetary and fiscal policy, and suggestions countries were planning to cut their dollar exposure made headlines daily. So, what action followed? None—there was no mass selling or foreign exodus from US debt. In fact, foreigners have been buying lately—Chinese holdings of US debt have increased $1 billion this year to date and foreign holdings by over $420 billion since June 2009.* China was buying debt last year too. The dollar crisis wasn't real—it was a hot air crisis.

Today's concerns sound very familiar—only now it's the euro that's rumored to be doomed, and it's a strong dollar instead of a weak one that'll supposedly sink our economy. As before, these rumors will likely abate soon. Not to mention the fact a weaker euro can also have direct benefits to European firms exporting goods, an incremental tailwind for the EU economy. And in today's emerging markets-led economic expansion, they could well be sending these exchange-rate cheapened goods to…China!

For investors, it's a lesson in the peril of falling prey to rumors and the importance of studying facts and actions, not words.


*Source: Department of the Treasury/Federal Reserve Board


*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.


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