Dollar Bears May Be Overreaching

While these players have successfully broken the dollar out of its well-worn ranges, it has yet to be seen whether it will force the hand of corporations and investors. The low-volatility environment may have made some corporations and investors complacent about hedging their dollar exposures.

Getting them to sell dollars would extend the greenback's selloff, and finally reward the speculators trading prowess. But I recommend money managers and U.S. corporations take advantage of the recent market action to hedge a greater portion of their exposure to foreign currencies.

It Ain't Going to Be Easy

The dollar's gyrations have once again coincided with swings in the pendulum of expectations of Federal Reserve policy. A week ago the fed funds futures were pricing in about a 1-in-6 chance of a Fed rate cut in March. The odds have since increased to almost 50%.

But there is good reason to take the Federal Reserve's tightening bias seriously. As one money manager told me in recent days, the consensus for the better part of two years underestimated the magnitude and duration of the tightening cycle. Remember the start of the year, the consensus was for "one and done" under former Chairman Alan Greenspan?

Ahead of the next FOMC meeting on Dec. 12, there are about 10 public speeches scheduled for Fed officials, including several from among the more hawkish members. Another three speeches will be delivered by Chairman Ben Bernanke and Vice-Chairman Donald Kohn, both of whom should stay on message: the risks of inflation are still greater than the downside risks to growth.

Moreover, Richmond Fed President Jeffrey Lacker seemed to have indicated the price of giving up his dissent against the Fed's recent decision to pause: tougher talk against inflation.

While price pressures have eased a bit, they still are elevated. As data for October begins to come in, it is likely to provide preliminary signs that the economy is performing better in the fourth quarter than in the third. And we might learn in a few days that third-quarter GDP was revised slightly higher. The labor market is tight and early estimates for November non-farm payrolls (reported Dec. 8) are for an increase of 125,000.