Dealers in Illogic

Dollar up or down, money traders profit

Strolling from his art-filled office through a bulletproof door to a balcony overlooking an immense trading room, Cairo-born Andre Levy pauses to deny a bit of gossip circulating among his fellow money dealers in Lausanne, Switzerland. He insists that it is just not true that his firm -- somewhat whimsically named Tradition S. A. -- exchanges half a billion dollars for stronger currencies each day. The actual figure, he states with aplomb, is "more than a billion dollars."

That correction is indicative of the frenzy with which corporations, banks and other holders of dollars are stampeding to unload them. The selling has driven the dollar down 19% against the German mark, 27% against the Japanese yen and 34% against the Swiss franc in the past year. Washington seems incapable of stopping the slump; even optimistic statements by the White House nowadays often have a perverse effect. Last week, for example, President Carter said at his news conference that congressional passage at long last of his battered energy legislation should trim the U.S. trade deficit and bolster the dollar. Next day the dollar hit yet another record low against the deutsche mark, dropped against the Swiss and French francs, the Dutch guilder and the British pound, and even sank to a 31-month low against the weak Italian lira. The apparent reason: moneymen concluded that if this is all the hope Carter has to offer, the dollar is still in trouble. Confidence in the dollar has so eroded that it sometimes plunges sharply these days with no specific news at all to account for the drop.

Money traders like Levy are, consequently, in the eye of a financial hurricane. Though they mostly act on orders from clients rather than initiate trades, they do the actual swapping of dollars for other currencies. And since their arcane business is little understood, they inevitably come under suspicion of abetting the recurrent panics that often cause the dollar to plunge further than any reasonable calculation of its purchasing power would warrant. As Otmar Emminger, head of the West German central bank, complains, "The currency markets have become absolutely irrational."

Surprisingly, many of the money traders agree, though they are making profits out of the irrationality, which they blame on their clients. Asks Andre Scaillet, chief money trader in Europe for First National Bank of Chicago: "Can you tell me if it's logical to have a 7 1/2% [downward] movement of the dollar against the Swiss franc in a single day? It's out of this world!" Money traders worry quite as much as any finance minister about what the drop in the world's central trading currency is doing to the global structure of finance. Says Michel Grare, trader for Credit Lyonnais, a major French bank: "It's very worrying if one can't believe in the U.S. What, after all, is Switzerland? It could be fragile." Not a few money traders openly pine for the pre-1973 days of fixed exchange rates, when their business was quiet and orderly -- much less profitable, to be sure, but infinitely less tearing on the nerves.

No wonder. In a world in which exchange rates change from minute to minute, money traders must constantly try to outguess their fellows. They scan Reuters and Dow Jones electronic display screens for up-to-the-second news. Suppose Teamsters Boss Frank Fitzsimmons makes a statement in the morning about how big a wage boost U.S. truck drivers will demand next spring. What are the chances that he will get it? If he does, what will happen to the U.S. inflation rate vs., say, the inflation rate in The Netherlands? How many holders of dollars will be prompted by the news to sell how many bucks? And what will that do to the dollar-guilder exchange rate? Based on his own instinctive answers to these questions, the trader -- cambist, to use the international term -- must decide within seconds whether to sell tens of millions of dollars for guilders right away. Or maybe wait until the afternoon, tomorrow or next week to act, or possibly even buy.

The pressure is unrelenting, and there are not many experts at the game. The volume of currency trading is six to ten times what it was only a few years ago; banks and currency firms have been forced to hire hordes of eager young men and women as traders. Most now practicing have only two years or so experience and their average age is under 30. They "burn out" in a few years. Even their bosses, the senior cambists, are rarely as old as 50 (Levy, the owner of his own currency-trading firm, is 49).

Unfortunately, the rule for making money has become: when in doubt, sell the dollar. Cambists unanimously cite three reasons for this: 1) there are just too many dollars (some $600 billion) floating around the world, the result of decades of U.S. balance of payments deficits; 2) the U.S. inflation rate, which is rising while rates in other countries are falling, gives holders of the dollar no confidence that the currency will retain its value; and 3) the Carter Administration has not convinced anyone that it can bring either U.S. inflation or the balance of payments deficits under control.

So long as those conditions prevail, the traders will be deluged with orders to sell. And they can eventually find another cambist to buy. Since the dollar is the world's primary currency, someone always needs bucks. A French oil refiner, say, has to pay for a shipment of Saudi crude, which is priced in dollars; a German investor needs dollars for a farm that he has just made a deal to buy in the U.S.

The selling comes from many sources. Recently some of it has originated in OPEC countries (Kuwait, Iran and Algeria) and in Communist countries that have accumulated dollars dealing with the U.S. and might now be selling to embarrass America. But the main dumping is from two sources:

CORPORATIONS. To them, selling the dollar is mere prudence. A Japanese company may book an order to deliver $1 million worth of steel to the U.S., with payment due in 30 days. Rather than wait to receive the dollars, which by then might be worth fewer yen, the company quite probably will immediately sell $1 million for as many yen as it can get, with the dol lars to be delivered in 30 days. U.S.-based multinationals do essentially the same thing. Hercules Inc., a major chemical company, in 1971 negotiated a five-year loan in Swiss francs, on terms that appeared to be favorable. But by 1976, the dollar had plunged so much against the franc that Hercules had to shell out twice as many dollars as it had bargained for to meet the 7% interest and repay the principal (both denominated in Swiss francs). Ever since, says Peter Petersen, Hercules' European money manager, Hercules has been forced to play the currency-trading game to limit its risk.

Corporate selling of dollars has been speeded up by several factors. Since 1976, accounting rules have forced U.S.-based multinationals to report quarterly -- not annually as before -- the profits or losses that result from changes in currency values. Many a corporate treasurer comes to the end of each quarter knowing that his company will have to report a heavy loss, possibly because it will have to pay more dollars to settle bills owed to German and Japanese suppliers in marks or yen. The treasurer sometimes will make speculative sales of dollars late in the quarter, seeking trading profits to offset part of the loss.

More ominously, money traders report, selling of dollars has spread to ordinary manufacturing companies in the

American heartland. Says Scaillet: "Ten or 15 years ago, American businessmen were so proud to have the dollar. If you talked about the possibility of a depreciating buck, they would laugh in your face. Now they are frequently more bearish on the dollar than the Europeans."

BANKS. They execute most of the orders for companies and also trade on their own account. An American tourist exchanges $100 for marks at a bank in Frankfurt; the bank can hold the dollars or sell them for other currencies, as it chooses. More important, a French cooperative, for example, deposits in Credit Lyonnais $1 million received from U.S. importers for Bordeaux wine; the bank can sell those dollars for other currencies if it wishes. Banks have a cold-blooded view of the potentialities. Says Jean Bourg, head of the currency department at Credit Lyonnais: "We take advantage of small opportunities [for profits in currency trading] as they arise during the day. We are not interested in trends, but in extremes and how to profit from them."

The orders descend on the cambists -- some working in money-trading firms, many employed by banks, a growing number directly for multinationals. Though they work on order, they have some latitude. If a multinational orders its bank to sell, say, $1 million for German marks on a particular day, in Europe it is up to the bank's trader whether to let them all go at once or sell $500,000 in the morning, the rest in the afternoon. In New York, a trader must execute the order at a time and price that the client specifies -- and if he accepts an order and then cannot fill it at the price he has quoted, his bank takes the loss.

The trading these days is almost round-the-clock. By the time European money traders get to their desks, usually at 8:30 a.m., the market has already gone through a full trading session in Tokyo. Trading continues in New York until late afternoon, which is late evening in Europe. Some market is open somewhere in the world almost all the time, and cambists must keep track of all. New York money-dealing firms now assign traders on a rotating basis as night men who make calls to fellow cambists at midnight (when it is 2 p.m. the next day in Tokyo) or even 2 a.m. (4 p.m. in Tokyo) to keep posted.

Instant communications are as much bane as boon to the traders. Bourg complains that "the daily newspaper is no good to me any more." By the time he gets to work, the news in it is already old and the markets are concentrating on later information coming over the electronic display screens. Moreover, adds Scaillet, the clients have their own screens: "Now 89% to 99% of the multinationals and large corporations get the same information as the banks at the same second. There is nothing worse than having the big corporations on your back [with dol lar-selling orders] the instant you receive the news yourself. It means you are instantly involved in transactions when a market doesn't even exist." Robert F.C. Leclerc, Montreal-born trader in New York for Chicago-based Continental Illinois National Bank, comments wryly: "If foreign-exchange dealers take any view at all, it is a very short-term one -- often as short as 60 seconds."

Hectic though the pace is, cambists generally claim to enjoy it. They are well paid; in Germany, salaries of $40,000 to $50,000 are common for traders in their late 20s. Beyond that, many cambists get a kick out of the very speed of the action. Michael Lend, 30, a money trader at Commerzbank of Frankfurt for the past two years, sometimes works from 6:30 a.m. to 9 p.m., and admits he is often too keyed up to sleep after a particularly hectic day. Nonetheless, he says, "it is fascinating because the market is so sensitive; it reacts quickly to political and economic events or just a key politician's remark. I love my job, it's great fun."

Senior cambists reluctantly admit that their subordinates' youth and inexperience may be aggravating the dollar's fall. The younger traders have never known anything but a sinking dollar; their impulse is always to sell, in maximum amounts, right away. But the boss traders too are disinclined to have their clients hold dollars. In their experience, those who have done so have usually lost money for the past several years.

Traders insist that speculation is not the driving force in the dollar's decline. But some concede that it is, at least, not insignificant. James Sinclair, partner in the New York money-brokerage firm named after him, estimates that individual speculation accounts for 18% to 20% of total currency trading. In Western Europe, he says, "it is the fashionable thing to do. The profits I've seen are almost obscene. I could tell you about a guy sitting across this desk in February who then had only $1,600 and only about two weeks ago sold $1 million. He is a nut; he carries more contracts than he can afford, especially naked shorts." Translation: the speculator has sold dollars he does not own, hoping to buy them back at a profit, any cambists try to dampen the speculation. Senior traders generally limit how many dollars a subordinate can handle each day and tell the young cambists to refuse any orders from clients who have not established a line of credit. Their own motivation, they say, is simply to get the best deal for their clients.

In relaxed moments, however, some cambists go on to describe how one could manipulate the market if one wanted to do so. Primary technique: sell when the markets are quiet -- early in the morning, or during the lunch hour, or best of all on Friday afternoon, when most cambists have closed their books and are starting to go home. An order then to sell, say, $40 million -- only fair-sized by today's standards -- can cause the market to drop sharply, since nobody is around to buy much. The exchange rate will plummet. Then a thousand other cambists will worry: "What does the seller know that I don't know?" and stampede to sell. Rates will plunge further, and the original seller can buy back the dollars at a handsome profit. Warning: if some unforeseen development causes the dollar to take off on one of its occasional brief upward flights, the cambist and his clients will take a bath.

In the end, the cambists function less as market makers than as weather vanes, registering every slightest change in international sentiment on how the dollar is going. They point out that they have no vested interest in seeing the dollar sink; they could make quite as much money for themselves and their clients riding the dollar up. But they have no faith at all that the U.S. will take the hard decisions needed to bring American inflation down to reasonable rates. They are waiting for President Carter to announce his Stage Two anti-inflation program, with a predisposition to believe it will be a ball of fluff, inducing their clients to sell more dollars than ever out of disappointment. Over to you, Jimmy.

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