Money And Curves Currency markets are not morality plays. The spot exchange rate reflects, among certain other factors, the relative returns between borrowing in one currency and lending in another. In the money market horizon, the most important for currency traders, these return differentials are determined first and foremost by expected changes in monetary policy between the two countries. We can summarize these expected changes by measuring the shape of the LIBOR curves between six and nine months; three months from now when the typical three-month forward transaction is unwound, today's six-nine month curve will reflect the then-prevailing three-six month conditions.We can measure the shape of these curves by taking the forward rate between six and nine months -- the rate at which you can lock in borrowing for three months starting six months from now -- and dividing it by the nine-month rate. The more this ratio exceeds 1.00, the looser the monetary policy is expected to be. Critically, these forward-rate ratios are comparable across economies and across interest rate levels. If we compare these forward rate ratios for the dollar and for the euro as reconstructed back to 1992, we see how U.S. monetary policy was significantly looser than Eurozone monetary policy over that period, as depicted in the pink shaded areas. This included the periods of 1992-1994 and 2001-2005, both of which saw a declining dollar. The periods wherein U.S. monetary policy was tighter, highlighted in orange and with blue rectangles, include late 1995, 1999-2000 and -- you guessed it -- today. All of these periods coincide with dollar strength