U.S. Dollar Soars To A Five-Week High: What Now?

U.S. Dollar Soars To A Five-Week High: What Now?

"Fundamentals" can hardly explain the dollar's recent strength

By Nico Isaac

Wed, 09 Dec 2009 16:15:00 ET

Long since thought of as "the rotting corpse" of the currency markets, the U.S. dollar reawakened to new life this week by rallying to its highest level in more than a month. For many -- namely those affiliated with the financial mainstream -- the dollar's revival came as a huge surprise.

Reason being: The two main fundamentals that supposedly drove the dollar to its 2009 "deathbed" were still very much in force. To wit:

The Interest Rate Factor: According to the usual pundits, the persistent, easy money policies of the Federal Reserve have held the dollar's head below water. Those being: Ten rate cuts in 12 months to a historic low of 0%. Here, a recent Wall Street Journal writes:

"Ultra-low rates have weighed on the dollar as investors use cheap dollars to fund bets in riskier assets, such as the euro and other high-yielding currencies... For [a sustained change in the dollar's trend], the Fed would have to be moving clearly toward an exit of its extraordinary easing measures."

Flash to December 7: That day, the Federal Open Market Committee released a very "dovish" periodic statement in which chairman Ben Bernanke reaffirmed his commitment to an "extended period of low rates." YET -- the U.S. dollar has continued to soar.

Next, the Economic Factor: Here, I'll let the following news item do the talking: "For most of 2009, the paradigm in the currency markets has been that good economic data was bad for the dollar as investors shun the low-yielding greenback... on hopes of a faster recovery." (Wall Street Journal)

YET -- in the wake of a recent, better-than-expected Jobs report, the dollar experienced its strongest single-day rise in a year.

Nico Isaac

US Dollar Index Chart -  12 09 09 (below)

(Click on chart to enlarge it for easier viewing)

For a longer term perspective, view the Dollar index chart below.
(Click on chart to enlarge it for easier viewing)

The US Dollar is still to the premier safe haven for the world when fear starts to rattle the foreign markets. Dubai and now Greece and Spain are nearing default on their debt. This fact plus the better than expected jobs report issued last week has sent the Dollar higher. We will have to wait and see if the US Dollar has begun a new uptrend or if this is just a blip and the dollar resumes it's down trend.