If you had to pick the single biggest driver of currency moves last year, it would undoubtedly be interest rates. The U.S. Federal Reserves persistence in raising rates — even when faced with $70 oil after Hurricane Katrina helped spur an unstoppable dollar rally last year.

Interest rates will continue to be a dominant driving force in the markets in the first quarter of 2006. What will be most important to watch will be the major shift that is about to occur — one that we have coined the interest rate shuffle.

Before discussing the shuffle, we first need to understand who did what last year and the impact that their actions had on the currency market. Figure 1 shows different countries interest rate policies in 2005 on a dove–hawk scale. Table 1 summarizes the interest rate adjustments made in 2005 by the major central banks.