From FT.com today:
Equity markets fell sharply on Monday after demand fears in China triggered one of the country’s largest one-day declines, driving investors from risky assets into the havens of dollar, yen and government bonds.
...
Losses on commodity and equity markets drove investors to seek safety in dollar and yen assets, leading to strong gains for the US and Japanese currencies on foreign exchange markets.
This is typical language in the financial press, imputing motivtion to "investors".
One version of Occam's razor for financial reporting might be "never ascribe motive to something that can be described by cash flows". We can apply it here.
- The US and Japan have the largest economies and the largest financial sectors
- Financial firms in the US and Japan dominate "overseas" investments.
- When markets sell off, it normally means that individuals and institutions are converting to cash
- This is naturally going to drive demand for the home currencies (or the relevant trading currencies) of the individuals and institutions
- So the dollar and yen will automatically tend to rise when China and other emerging markets sell off -- there's no decision involved about safey
Of course, economists will dismiss this as handwaving, and people in the financial press will point out that this doesn't sell papers (or ads).
The economists would be right. To make the above rigorous, one would have to get more data on historic cash flows, and also get some empirical data on the ratio of large traders to small traders, and get an idea (from press reports) of how large traders actually operate. However, traders such as Taleb famously don't read the financial press, because they claim that this kind of analysis ("seeking safety") is just silly. So I offer the above analysis.
