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The economist Rudiger Dornbusch, who died last month, studied in his seminal paper, "Expectations and Exchange Rate Dynamics", published in 1975, the apparently irrational ebb and flow of floating currencies. His conclusion was that markets overshoot in response to surprising changes in economic variables.
Yet, even Dornbusch ignored the fact that some price twirls have nothing to do with economic policies or realities, or with the emergence of new information and a lot to do with mass psychology. How else can we account for the crash of October 1987? This goes to the heart of the undecided debate between technical and fundamental analysts.
But, as the late Rudi Dornbusch pointed out in August 2001: "There are two kinds of Treasury Secretaries those like Robert Rubin who understand that a strong dollar helps get low interest rates and that the low rates make for a long and broad boom. They think too much about competitiveness and know too little about capital markets ...
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