Mike Norman, HardAssetsInvestor.com (Norman): Welcome back, folks, to HardAssetsInvestor.com. I’m your host, Mike Norman. We’re here with the second half of our interview with Michael Woolfolk, who is the chief currency strategist at Bank of NY Mellon.

Michael, Fed and Treasury over the course of the last year and a half took unprecedented actions. We talked a little about that in the last interview: taking interest rates down to zero; the bailout.

A lot of people were very critical of these actions and said that as a result of those policy moves, you were going to see a very negative impact on the U.S. dollar. And it didn’t really happen.

And you can actually point to those specific moves: from the invention of the Treasury, auction facility and other conventions by the Fed that didn’t exist before, to actions to rescue Bear Stearns, and then AIG, and Fannie Mae and Freddie Mac. On each of those occasions, we actually saw the dollar rally against a broader group of currencies.

So getting back to this question … the aggressiveness of the policy response, in contrast to the meekness in Europe by the ECB … can we take that as a positive for the dollar, or does it – as the doomsayers would say – does it just postpone the inevitable, that the buck is going down no matter what they do?

Michael Woolfolk, chief currency strategist, Bank of New York Mellon (Woolfolk): Well, the answer is not clear cut. There are certainly two issues that you have to look at. The first one is confidence of the market in the policy steps. Are they prudent? Does the market believe that they are necessary?

Slashing interest rates to 1% was one thing. Taking them to zero percent is quite another. Were the steps viewed by the market as prudent? Necessary? I think the answer is yes. Although it was negative for the dollar. When the fed cut to zero interest rates in mid-December, the dollar declined against a number of currencies. Most notably against the euro. What was going on there?

Another factor – besides whether or not this was a prudent step by the Fed – is, what are the interest rate differentials? You had unusually illiquid market conditions late in the year. And you also had unusual conditions, in that many had just divested an enormous amount of money out of stocks, out of bonds, and they were waiting going into the end of the year. With the Fed slashing interest rates – particularly on deposits – that cash then went to higher-yielding deposits in the eurozone, which is one of the reasons the dollar suffered somewhat there.

But as we go forward, as the Bank of England slashes interest rates — they cut 50 basis points today [January 9] – it’s going to zero percent. It’s going to do that in the first quarter … the Bank of Canada is going to zero percent in the first quarter – second quarter the ECB follows.

Now the euro is likely to maintain some strength throughout the first quarter, until they succumb to the inevitable zero interest rate policy.

Norman: When you say strength, are you talking about maybe maintaining an exchange rate to the dollar about where it is right now … let’s say 135, 137 or higher?