Dollars - is it buy one get one free?

THE dollar didn't quite hit two for one but it got pretty close and could still well break through that barrier in due course. There isn't really a cap on what pessimists would have you believe the dollar could fall to because the US is famous for its apocalyptic investment predictors. Outside of the "end of the world is nigh" brigade, a mainstream bear could see $2.30-$2.40 to the pound in the next 18 months. However, signs of the end of the slide are already here.

It's a classic reversal sign when any financial instrument is headline news and clearly the dollar slide has hit the mainstream media big time; the other is that Europe and the UK are already hurting from the strengthening of their currencies. Amid all the "buy one get one free" dollar hoopla, a rather sinister fact has been overlooked: this slide is "Atlantic Rim" based, not "Pacific Rim" based. While the pound and euro have been taking off against the dollar, the yen is barely up 2 per cent on the year, the HK dollar is actually down and the yuan has strengthened, but it is supposed to, as the US begs Beijing to revalue. As such, the UK and Europe are enjoying strong currencies - up 12 per cent and 11 per cent respectively - and it's not necessary a sign of US financial disaster. In fact, the opposite might be true.

While it's great to buy cheap imports and get commodities on the cheap, it's also good to be able to sell things to the rest of the world. This is made increasingly difficult with a high exchange rate. London is already one of the most expensive cities in the world without the help of a high exchange rate, yet strangely we love this situation, at the same time bemoaning our lack of a manufacturing industry. Clearly if you want to trade with the world, having a "Pac Rim" exchange rate is more than a little helpful. The French see the writing on the wall. Revaluing the euro against the rest of the world doesn't seem to make much sense in a zone that finally sees the possibility of some decent levels of economic and employment growth.

Sanity normally reasserts itself and the likelihood remains that the pound and euro are at, or near, the cyclical highs and that the current rising European interest rate environment will be capped by the need to reign in currency appreciation. Modern central banks are, at least we hope, a much smarter breed of managers than the amateur political controllers of the past.

As such, the current currency spectacular should signal the top of the interest rate cycle. This in turn means the good times will continue to roll and that the stock markets will continue their rallies. 2007 should see the FTSE at - or through - it's all-time highs, with the US markets breaking into further new ground on the Dow. Of course, even central bankers are human and interest rates could still rise, and the eurozone could price itself out of the world market and the end of the world could be nigh, but the prospect of going long on soap and corn beef has never appealed much to me.

• Clem Chambers is CEO of ADVFN, Europe's leading stocks and shares website. For free real-time share prices go to: www.advfn.com E-mail: [email protected]