Turkeys in the Forex Barn

It was widely reported yesterday that South Korea's central bank, the world's No. 4 holder of dollar reserves, had decided to "diversify" its holdings, which everybody and their grandmother took as a signal to sell dollars hard:

NEW YORK (Reuters) - The dollar tumbled on Tuesday as markets grew concerned about the likely impact of South Korea's plan to diversify its reserves out of U.S. assets, pushing the currency below key technical support levels.

South Korea's central bank, which holds a large chunk of U.S. Treasuries, said on Monday it planned to spread its reserves, which are the world's fourth largest, among a greater variety of currencies.

Since then, however, South Korea has clarified that it had no intention of selling any dollars. Several analysts suggested the same thing yesterday. It would appear that South Korea was simply reiterating an earlier stated policy to seek higher yield in other kinds of bonds, while hanging on to its stockpile of dollars.

Some observers, though, are still skeptical. And the wave of terror that spread through the forex market yesterday is telling -- everybody's waiting for a central bank to start selling dollars.

A commenter to Angry Bear's post today about it had this funny story about how central banks will approach selling their dollar assets:

Hmmm, let me bore you with one of those sickeningly cornpone "down on the farm" stories. When our friends the turkey farmers first took us up for the "tour" we were amazed when they indifferently swung open a 30 ft door, behind which were thousands of turkeys. I asked why the expected charge for freedom did not materialize. Were domesticated turkeys really that stupid?

"Well, they are dumb but not that dumb. They know the door's open, but they are afraid of what might be out there. One or two will go out, then scurry back, but eventually, yes, they all would come out."

Bankers and especially politicians are pretty much the human equivalent of turkeys, as we all can agree. :D The BOK was simply the first turkey to take that tenative step outdoors. That's what's important - this means the door is truly open. The scurrying back is unsurprising because we are dealing with turkeys, not, say, goats.

So the important thing is the state of the door. This is the first sign that it was opened. I think it's stuck that way, personally.

It is a funny story, and that's probably the way it will happen. But it's still not clear that South Korea was actually the first turkey out of the barn. A lot of analysts say the turkeys will be content to stay in the barn. I'm not sure one way or the other, but it is a little scary that a country like South Korea has this kind of power over us. What would happen if China up and decided to dump dollars? Yikes, indeed.