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New hot investment: Those dollars in your wallet

November 30, 2010 |  9:59 pm

The Federal Reserve’s program to pump hundreds of billions of dollars into the financial system via bond purchases was supposed to further weaken the dollar.

But just the opposite has happened: The buck has been the strongman of global currencies for the last month.

This is one case where “sell on the rumor, buy on the news” would have worked like a charm.

After telegraphing its plans for more than two months, the Fed on Nov. 3 announced its so-called quantitative easing program: The central bank said it would ramp up purchases of U.S. Treasury securities through mid-2011, with the goal of keeping downward pressure on long-term interest rates and getting more money into the real economy.

Dollar1130 Flooding the world with more dollars was supposed to have the side effect of further devaluing the greenback, which would (in theory) help the U.S. economy by making American exports cheaper abroad.

But the dollar hits its low for 2010 on Nov. 4, one day after the Fed’s announcement. Since then the DXY index of the dollar’s value against six major currencies (charted at left) has surged 7.1% to a 10-week high of 81.29 as of Tuesday.

Traders who bought the PowerShares DB U.S. Dollar Index Bullish exchange-traded fund on Nov. 4 would be up about the same percentage amount since then, from $21.97 to $23.50 a share.

Global events have come together over the last month to restore the dollar’s “haven” status, at least temporarily: The euro has been battered by the continent’s resurgent government-debt crisis; Asia-Pacific currencies have been hit by China’s attempts to slow its economy and by North Korea’s military provocation against South Korea; and U.S. economic data have continued to improve (except for housing).

This Friday’s November employment report from Washington could be key to the dollar’s next move: If the economy created more private-sector jobs than expected last month (the consensus estimate is for about 155,000) it could cement the idea that the U.S. recovery is picking up steam, which should be bullish for the buck -- maybe even if the Fed keeps the money spigot open.

Note: The DXY index still is 8% below its 2010 peak of 88.40 reached June 4, when the euro was hitting its lows in the last debt-crisis go-round. The euro fell as low as $1.19 in early June; it's now at $1.30, down from $1.42 on Nov. 4.

-- Tom Petruno