Between 20 November and 17 December, the euro appreciated by 15% against the dollar.

The dollar's recent spate of weakness is largely explained by the measures taken by the US Federal Reserve (the Fed) to stimulate the economy:

• the radical cut in its funding rate and the possibility that the Fed will (among other actions) buy up long-term government debt (which has pushed down bond yields in $) have made the interest rate differential very favourable to the euro. The gap between 10-year euro and dollar rates is now at its widest since the introduction of the European currency;
  
  
• the fear that with interest rates at zero, the US Central Bank will now start to “print money” and thus devalue the dollar. (In one year, the Fed’s balance sheet has tripled and its total assets are now equivalent to nearly 20% of the United States’ GDP.)
  
  
• added to this is the fact that the credit crisis, which was at the source of an explosion in demand for dollars (repatriation of US capital, massive unwinding of 'carry trades' in dollars, the need for dollars by companies in emerging countries), seems to have become a little less acute since the end of October.

On the currency markets, the question for 2009 is not which will be the strongest currency but which will be the least weak. Every country/region has its problems and none should be interested in having a strong currency in the current deflationary environment. A number of factors lead me to think that the dollar could start to appreciate again against the euro:

• the European Central Bank could soon be forced to imitate its American counterpart and rapidly reduce interest rates (which remain the highest of all the G-7 countries). The economic situation in the euro zone has markedly deteriorated. The rather unorthodox measures now being rolled out by the US authorities could help the United States out of the economic slump faster than Europe, since Europe has neither the will nor the possibility (having no supranational fiscal authority) to rapidly implement a plan for pan-European budgetary stimulation;
  
  
• the credit crisis could flare up again in 2009 and cause a new flow of capital to the dollar. This year’s events have shown that in times of crisis, the dollar benefits from its status as reserve currency. The dollar and the equity markets should thus remain inversely correlated;
  
  
• the currency strategist at Morgan Stanley, Stephen Jen, suggests that instead of comparing the fundamentals of the dollar with those of the euro, we should be comparing those of the 'de facto' dollar zone (the United States + Asia) with those of the 'de facto' euro zone (Euro Zone + Eastern Europe), given that the principal Asian currencies (particularly the Chinese yuan) are pretty closely linked to the dollar and the currencies of those Eastern European countries that are part of the European Union are connected to the euro. By this reasoning, the dollar will be boosted by the good economic fundamentals of the Asian countries while the euro will be weakened by the poor fundamentals of Eastern Europe.