Dollar Bears Mercifully Silent

"The old dollar, she's going down" -- Bill Gates at Davos, January 2005
"In your dreams, Windows-boy" -- Howard Simons

Was there anything more tedious than listening to all those dollar bears a year ago proclaiming that the greenback was not going to be worth the paper it was printed on?

Their arguments were repeated breathlessly, and could usually be summarized as saying Americans were going to get comeuppance for their wicked, wicked ways by seeing the dollar sink, interest rates rise, stocks get pounded and (shudder) their ability to keep on consuming curtailed.

They were wrong then and they would be wrong today if they were so foolish to keep their jaws flapping about our twin budgetary and trade deficits in the face of an upside breakout in the dollar.

But this is not me duplicating Randy Moss' touchdown salute to Green Bay Packers fans (although my November 2004 observations on stocks and the dollar and my February 2005 observations on stocks and the trade deficit, both of which contained admonitions to the dollar bears to do their homework, might justify such an end-zone dance). No, this is about questioning whether the dollar rally has room to run and which stock groups would be helped or hurt most thereby.

Money And Curves

Currency markets are not morality plays.

The spot exchange rate reflects, among certain other factors, the relative returns between borrowing in one currency and lending in another. In the money market horizon, the most important for currency traders, these return differentials are determined first and foremost by expected changes in monetary policy between the two countries. We can summarize these expected changes by measuring the shape of the LIBOR curves between six and nine months; three months from now when the typical three-month forward transaction is unwound, today's six-nine month curve will reflect the then-prevailing three-six month conditions.