Right now, the dollar is friendless. Ben Bernanke, the Federal Reserve chairman, kicked off the week with a speech that was long on economic uncertainty and short on inflationary pressures. Then, over at the Treasury, Hank Paulson warned that the stench of rotting mortgages would linger for a while. Housing data a day later backed up his prognosis. There is little prospect of co-ordinated intervention to support the dollar’s decline coming out of this weekend’s meeting of the group of seven leading industrialised nations. Perhaps most remarkably, Rodrigo de Rato, outgoing head of the International Monetary Fund, declared the dollar overvalued – just over a week after being quoted saying the opposite.

No wonder dollar bears are back on a roll. A month ago, Fed funds futures were pricing in less than a one-in-five chance of a 25 or 50 basis point cut in the Fed’s target interest rate by mid-December. Now, as the fear of a US recession has grown, the probability is put at 65 per cent, according to Bloomberg.

As yet, there is little prospect of the dollar being thrown a lifeline from across the Atlantic. UK and eurozone interest rate futures have been volatile. Eventually, it is possible that the economic weakness in the US could prompt panic in Frankfurt and London. But today, with economic growth on their side of the pond still looking reasonable, there is no clear indication that European rate expectations have shifted towards cuts. Indeed yields on US two-year and five-year Treasuries have recently slipped below those of their German equivalents.

Admittedly, in the medium term, the Fed’s ability to run a cheap-money policy may be constrained. Inflation expectations, as measured by inflation-protected bonds, have been creeping up again since late August. There is also a fair fundamental and technical case that the dollar is undervalued. But at the moment it does not look like interest-rate differentials will offer any near-term support.

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