THE Bundesbank caught the market off guard on Thursday when it slashed 50 basis points from both the Lombard and discount rates. Although the dollar benefitted from interest rate speculation at the beginning of the week, when the rate decline was announced, the US currency jumped three pfennigs. Further gains were recorded on Friday as other European countries followed the German lead on interest rates. The big question now is whether the dollar can maintain its new found support. The probability of this is high if the market perceives that the new Bundesbank head is embracing a more lenient style of monetary management. But traders are notoriously fickle, and while the talk in the market place this weekend is firmly pro dollar, a disappointing US GDP figure on Thursday or a poor consumer confidence number could raise doubts about America's economic health and trigger profit-taking. Even in the absence of economic news, it is unlikely that the dollar's ascent will be uninterrupted. For all but the very short term investor, however, we would suggest buying dollars on any pull back. We believe that the deutschemark and other European currencies are set to weaken further against the dollar. Decelerating inflation and money supply growth in Germany, and miserable economic conditions should prompt further Bundesbank action before the end of the year. Clearly, if Hans Tietmeyer wants to save the German economy from lingering recession, he has little choice. So far, Britain has resisted joining the European rate cut orgy. Some short term traders took advantage of this on Friday and bought sterling against the deutschemark and other European currencies. This looks like an interesting play in the short term despite the fact that British rates are likely to move down around the time of his budget speech at the end of November. Both the Canadian and Australian dollars have advanced during last week. Positive developments on the political front could underwrite further appreciation in both currencies. Pauline Gately is head of research at BNP International Financial Services