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The dollar rises, and (almost) nobody is happy

October 30, 2009 |  4:11 pm

Blame the almighty dollar -- or, uh, the slightly less anemic dollar.

Friday’s big sell-off on Wall Street and in the commodity pits was accompanied by another rise in the greenback’s value against other major and minor currencies.

The DXY index, which measures the dollar against six other key currencies, rallied 0.5% to 76.3, the sixth increase in seven trading sessions.

The euro fell to $1.472, down from $1.501 a week ago. The dollar was worth 1.76 Brazilian reals, up from 1.72 a week ago.

The dollar had mostly been declining since late April, a reflection of global investors’ willingness to abandon the relative haven of the U.S. currency for riskier assets -- including emerging-market stocks and raw materials.

Dollarbill And with U.S. short-term interest rates near zero, investors also have taken to borrowing in dollars to fund purchases of investments worldwide. That’s the so-called carry trade.

But in the last two weeks, as worries have mounted about the strength of the U.S. economic recovery, the dollar has staged a modest comeback.

On the face of it, that’s counterintuitive: If the U.S. economy struggles, shouldn’t that mean a weaker dollar?

It should, over time. But in the short-term, concerns about the U.S. stoke fears about the global economy as well. And that is helping to drive some investors and traders out of the riskier assets that have been so popular since March, and into "safer" things -- including U.S. Treasury securities.

"It’s the unwinding of the carry trade," said Marc Pado, U.S. market strategist for brokerage Cantor Fitzgerald.

As long as that’s going on, it’s bullish for the dollar.

It’s no coincidence that the recent low for the DXY index -- 74.97 on Oct. 21 -- also marked the recent high for the Reuters/Jefferies CRB commodities index. The CRB index is down 4.8% since then, including Friday's 2.1% drop.

Crude oil futures fell $2.87 to $77 a barrel on Friday, the lowest price since Oct. 14.

The iShares Emerging Markets Index exchange-traded stock fund has tumbled 9.6% from its recent high reached Oct. 14, as stock markets in Brazil, South Korea, India and other emerging economies have tripped.

Why, though, should U.S. stocks fall just because the dollar rebounds? The fundamental reason is that a stronger dollar hurts U.S. exporters by potentially raising prices of their goods abroad.

But the knee-jerk reaction of traders may be a bigger factor kicking the U.S. market lower: If hedge funds and other traders are buying the dollar they’re automatically going to be selling U.S. stocks, just as they were simultaneously selling the dollar and buying stocks for much of the last seven months.

As long as the formula works, there are plenty of players for this game.

-- Tom Petruno