Dollar Rebounds From Thrashing

In terms of both duration and magnitude this bear market does not appear unusual. Even some of the anxiety over its decline and the existential angst expressed in some quarters is vaguely reminiscent of the mid-1990s, the last time the dollar was setting record lows against the then Deutschemark.

I had expected an acceleration of the dollar's losses into the end of the year on the back of our understanding of the trajectory of policy -- i.e. Fed rate cuts -- and the microstructure of the market, which I understood to provide many market participants little incentive to fight the dollar's powerful downtrend. We see the dollar as having been punished for the Fed's pro-growth policy thrust, but expect that other countries are as little as four and as much as nine months behind the U.S. in the credit cycle.

And as other countries cut interest rates, we look for the dollar to stage a more sustained recovery. We have identified the Bank of England and the Bank of Canada as the candidates most likely follow the Fed, with the ECB not cutting rates until late in the first quarter or the second quarter of 2008.