The short-term story is a simple one. The dollar weakness of mid-summer had gone too far, particularly against the yen. True, the underlying current account imbalance between the two countries remains as large as ever, with the US current account stuck at a deficit of 2.5 per cent of GDP and the Japanese at a surplus of 2.5 per cent of GDP. But the fiscal position of the US is much stronger than that of Japan - a deficit of 1.8 per cent of GDP, while Japan is projected to run a deficit of more than 4 per cent of GDP both this year and next.
This disparity is partly because they are at different stages of the economic cycle, but if you allow for pension liabilities, the US situation is not only vastly better, but projected to be much better through the first 30 years of the next century.
Against Japan, the case for a recovery is particularly sharp because of the degree of over-valuation of the yen. Against Germany, though the mark is also somewhat high on a purchasing power parity basis, the case is more on the changing economic fundamentals.
Whereas before reunification Germany had a large current account surplus and frequently also ran a fiscal surplus, now it has neither. It is in current account deficit to the tune of close to 1 per cent of GDP, and has a fiscal deficit of more than 2 per cent of GDP (acceptable but significantly larger than that of the US).
This would be enough of a case to underpin a straightforward bounce back by the dollar against both the yen and the mark, but there are two much more interesting possibilities. The first is that we are seeing not just a bounce, but a solid medium-term recovery. This view was articulated last month, before the recent recovery was really under way, by NatWest Capital Markets, whose projections are shown in the graph.
This is expressed in trade-weighted terms, but translated into currency rates, it would suggest, according to NatWest, a dollar peaking at 125 in two years, a DM1.80 rate, and a sterling rate of $1.25. (British would- be holiday-makers, planning a trip in 1997 should wait a bit: NatWest projects the pound back up at $1.57 by December 2000!)
NatWest has three main reasons for this view: real interest rate differentials shifting in its favour; a serious move to a balanced budget in the US; and a secular improvement in the current account. But, as the bands on the graph show, NatWest also believes the secular trend is still downwards.
That may well prove right, but it leads to the tantalising possibility that the very long-term downward trend of the dollar may reverse itself during the next century.
On a 40-year view, the yen and particularly the mark have been sound currencies, gradually increasing their value against the dollar. On a 100-year view they have been catastrophic currencies, having their value wiped out at least once. To point that out is not to argue that there will be a rerun of the great German inflation of the 1920s, still less a revival of the Japanese militarist tendencies of the 1930s. Rather it is to point out that we should not assume that a chronically weak dollar (or for that matter a chronically weak pound) will be with us for ever. It is at least conceivable that the early part of the next century will see a grand turning point in the fortunes of the dollar.
For that to occur, two things need to happen. First, there really does have to be a change in the savings pattern of the US. The balanced budget process must be secured, and US citizens have to rediscover the attractions of building personal savings. Second, there must be a recovery in the relative performance of the US economy vis-a-vis the rest of the world. What are the chances of these changes occurring?
The balanced budget story is the one that has attracted attention and NatWest's positive judgement may well be right, but I am more interested in a change in attitudes to savings. Looked at rationally, shifting a couple of percentage points of personal income from consumption to savings (less than a year's growth in income for many people) would over a decade transform the condition of most American families.
Economists talk in terms of the financial effects of shifts in the sectors of GDP, but the social impact of a shift taking place at a family level would mean much more to most people. And other grand changes are stirring in the US - the new emphasis on families, for example - which would chime in with a rediscovery of the joys of saving rather than spending.
As for the recovery in the relative economic performance, that is surely happening now. Not only has US industry greatly improved its competitiveness, but in the new "soft" industries such as computer software and entertainment, US dominance has increased dramatically over the past decade.
The key indicator is the US surplus on trade in intellectual property, where it is one of only three countries to be in the black (the other two being the UK, a long way behind, and Sweden a poor third). The largest deficits are those of Germany and Japan. As information becomes infinitely available, countries will find it harder and harder to hold much of a lead in physical trade; they will distinguish themselves by the extent to which they generate new ideas.
Of course it cannot be proved. But there is surely a solid possibility the US economy (and hence the dollar) will look relatively much stronger in 10 years than it does now. If so, then this summer may turn out to be more than just a cyclical turning point for the dollar.