by Nicholas Hastings Between them, the European Central Bank and the Bank of Japan make a further rally in the dollar more likely. In fact, the US currency could now be headed for the third significant rally since the end of Bretton Woods in 1971 when the dollar was taken off the gold standard. This is according to the currency strategy team at Brown Brothers Harriman who reckon that the divergence in monetary policy that has been driving the dollar higher is not just about the imminent tightening by the US Federal Reserve. “What makes this force so potent is that the others are still moving in the other direction,� the team says in their latest piece of research. The comments come after the ECB made “an unambiguous signal� to investors that further monetary easing is on its way as early as December. This easing will more than likely take the form of extending the length of the central bank’s asset purchase exercise, but ECB President Mario Draghi did admit that the possibility of another cut in the bank’s deposit rate was discussed at the latest board meeting. Some market commentators argue that this dovish tone from the ECB will make it more likely that the Bank of Japan moves to ease monetary policy further as early as next week given the rise in deflationary pressures and the high risk that Japan will show a second consecutive quarter of contraction. The BBH team aren’t among those who are convinced that the BoJ will ease again just yet. Nevertheless, they still see this policy divergence as “the key macro force driving the capital markets�. They see the first phase being when other countries are easing policy while the Fed prepares to start normalising its policy. “The second phase begins with the Fed’s lift-off,� they say. The team admits it has struggled to get the timing of transition from phase one to phase two right. But, they conclude, “we continue to believe that the second phase will materialise�.

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