[walden]

That's a trading perspective (which helps), but what I think we're trying to understand is a more macro economic perspective.

For instance, right now the dollar is the weak currency-- what that means for U.S. consumers is imports become more expensive while U.S. goods become competitively priced, for U.S. producers is export sales go up along with domestic sales. So this would tend, in time, to create stronger U.S. business profits, more U.S. jobs, smaller trade deficits, and an improving economy overall. The short-term pain to the U.S. consumer should be offset by the improving economy overall. Right?

Meanwhile, the Euro is the strong currency, and since they're already having economic problems, they're really going to suffer, and there's not a whole lot they can do about it.

Anyway, I don't know to what extent these currency fluctuations are orchestrated by central banks and to what extent they're purely market phenomena, but years of observation leads me to believe that imbalances work themselves out over time.

[SAJ]

That was a nice concise summary of the international business cycle, or at least how it has worked in theory since the collapse of Bretton Woods in the early '70s.

But, as usual, actual practice diverges from theory most of the time. Central banks do, of course, try to game the system -- the Japanese, historically, have been utterly shameless about doing so; these days they're considerably more low-key (witness the 'stealth' intervention in Jan-Mar of this year to keep JPY from popping much higher vs USD). The power of central banks is considerably overstated, though. When the political types do something sufficiently egregiously stupid (e.g. the British adherence to an ERM -- the precursor to Eurocurrency -- that become completely unworkable after German reunification in 1991), a central bank can no more stop the inevitable crash-boom-bang than King Canute could halt the tide.

Add to this factor the next one, that central banks don't always get things right (again, witness the refusal of ECB to cut rates, both this past week and generally this year...notwithstanding that Wonderland (my name for the Eurozone) is staring recession in the face), and you have a recipe for all kinds of fluctuation in currency rates, much more than one would expect from theory.

Always remember that investors and traders have gigantically more total capital than any central bank, and, as a class, are not about to accept the most convenient bits of hokum and nonsense uttered by either central bankers or (especially) politicians when their policies have put one or another currency under the gun. When CBs and pols HAVE tried this, the currencies involved have been simply destroyed, and in very short order. Fortunately or not, these creatures seem to be finally learning this fact, at least to a limited extent. It's possible that their acceptance of this fact will devolatilise foreign exchange rates in future...but I'm not holding my breath on that one. :^)

FReegards!