Indeed, investor’s sentiment towards the dollar has improved significantly during the last few weeks. In particular, after the US Federal Reserve Meeting signaled an exit strategy from quantitative easing. In the recent past, investors were taking loans in US dollars and then exchanging the greenback for other high yielding currencies like Brazilian Real or Australian Dollar. However, recent Fed actions brought the possibility of interest rates hikes within the next few quarters, thus making investors more optimistic about gains in US dollar holdings.
In addition, the recent rally in the dollar, especially against the Euro, has a lot to do with different growth expectations. In fact, recent economic indicators are showing that while the United States economy is on its way to recovery, the Euro Area is facing some really strong head winds. In one hand, retail sales are rising faster than expected in the United States and labor data has also improved significantly. On the other hand, European banks have a big exposure to the Middle East market and Dubai’s announcement about a possible debt insolvency has been hiting investor’s confidence. Moreover, a series of credit-rating cuts for Greece has brought into light the possibility of fiscal instability in some European countries going forward. Eventually, foreign investors will sell the euro should Spain and Ireland run into troubles during 2010.