Coby, I assume you mean what happened in 1985 as your main question. That was the year that most of the down move in long term interest rates took place. The dollar had been doing fairly well, as foreigners bought our bonds for their relatively high yield, especially compared to German and Swiss rates. As rates moved down swiftly, gains in the dollar started to turn into losses and foreigners moved out. The bond yields fell from 12% in mid-1984 to 7.25% in mid-1986. The dollar peaked when the trend became obvious.
Then, Baker and Reagan killed the dollar in late 1986, as Clinton, Rubin and Greenspan are doing today, and bond rates started up again, peaking near 10% in late 1987. That decline in the buck is what you see in 1987 numbers.
IMHO, we are going through a similar move now with respect to Japanese bonds and currency. The yen has gained strength as our bond rates have come down and too many dollars have been printed.
BTW, the 1984-1987 period is one I know well, as I was managing one of the world's largest bond funds at the time. I also remember previous bottoms in the dollar. When I was in the Army, 1966-1970, we used to play poker. Early on, a DM and a quarter were considered the same thing. Not so by mid 1969. <G> When I went back to Germany in 1973, if somebody raised you a DM, you had to put two quarters and a dime in the pot, and, in reality, nobody really wanted the US trash.
It is all part of the currency/trade deficit/bond yield shell game govts play.
MB
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