Fundamentally, with all the increase in supply, poor economic indicators, failing banks and major companies, the USD should be dropping. The counter for that is that USD is a repatriation currency, and a flight-to-safety is keeping the USD rallying.
I came across this artile by Dr Barton on why the dollar has not died. I thought its pretty interesting so have provided it below. Enjoy!
-----------------
Three Reasons Why the Dollar Has Not Died
by D.R. Barton
This much is clear: the U.S. government is borrowing unprecedented amounts of money and is printing or is about to print unheard of amounts of greenbacks to cover the cost of bailouts, stimulus programs, etc.
This, however, is not a political discussion, but a financial one. Better yet, it is a discussion of behavioral finance.
The simplified argument on the dollar goes something like this: the increased supply of U.S. currency is now, or is going to soon be massive. With the world being flooded with U.S. dollars, the value should go down and go down hard.
In the long run, this view is probably very valid.
But for now it’s not working out that way. The question is “Why not?”
If I were to ask my third grade economics students this question, they’d immediately answer that we’re only looking at one side of the supply and demand equation.
Clearly, even with supply growing, demand is growing even faster.
Three Reasons People Still Want U.S. Dollars
Since last summer, the dollar has strengthened against almost all major currencies.
Here’s an example with the Euro on a weekly chart (notice that in Forex land, they use the Euro/dollar cross, meaning that downward movement equals a stronger dollar):
The chart is pretty self-explanatory. If we fully test the October ‘08 lows, I would expect the first test to be a failure since the Euro is oversold on a weekly basis, and we do have a strong divergence.
However, the reasons for the dollar’s strength in the face of overwhelming fundamental forces is pretty interesting.
The dollar is still the world’s reserve currency. As long as the world does business denominated in dollars, then underlying demand will still exist. And if one thinks the dollar could lose this role anytime soon, there really is no close second. The yen has its own problems, coming out of decades of non-existent economic growth. The Euro has worse troubles than the dollar with the eastern bloc banking system on the ropes. And the next reason backs up reason number one pretty well.
The U.S. will be the world hegemon for the foreseeable future. I have to give credit for this phrase to my business partner and market maven Christopher Castroviejo, whose Harvard education often bleeds over into his macro economic analysis. In short, the U.S. is still the world’s dominate military power, and this will be a foundation for the dollar for years to come.
The dollar's perception is that of safety and strength. Dennis Gartman, writer of the his eponymous letter, likens the dollar to the “world’s family mattress.” It’s where people stuff their money in times of trouble. And clearly, people are voting with their trades and saying that these are troubled times.
For all of these reasons, the correlation is currently that tough economic times and downward equity moves mean upward moves for the dollar. And that’s not likely to change anytime soon.
Great Trading!
D. R.
About D.R. Barton: A passion for the systematic approach to the markets and lifelong love of teaching and learning have propelled D.R. Barton, Jr. to the top of the investment and trading arena. He is a regularly featured guest on both Report on Business TV, and WTOP News Radio in Washington, D.C., and has been a guest on Bloomberg Radio. His articles have appeared on SmartMoney.com and Financial Advisor magazine. You may contact D.R. at “drbarton” at “iitm.com”.
