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The dollar's new status: strongman of global currencies

August 27, 2008 |  2:37 pm

The way things are going with the dollar, the cost of a London, Paris or Australia vacation may soon be back within the realm of possibility for some Americans.

The formerly weakling greenback has been on a hot streak since mid-July, racking up big gains against many other currencies.

The dollar’s rally against the British pound has been particularly striking: It took $2 to buy one pound on July 15. Now the cost of a pound is about $1.83 at the official market rate (the rate for large transactions), an 8% drop in six weeks and the cheapest the British currency has been in two years.

Fipound28The euro, at $1.473 today, is up a bit from the six-month low of $1.465 it reached on Tuesday, but still is down from $1.59 in mid-July.

The Australian dollar is worth about 86 U.S. cents, down 12% from 98 cents six weeks ago.

The driving force behind the dollar’s comeback, after six years spent mostly in decline: the perception that, even though the U.S. economy is struggling, things are rapidly getting much worse in other countries. Currencies tend to reflect the strength of their home economies, so the buck now is gaining at its rivals’ expense.

"The market is just coming to realize that the fundamental outlook for the rest of the world is getting grimmer by the day," said Win Thin, a currency strategist at Brown Bros. Harriman & Co. in New York.

Japan’s economy contracted in the second quarter even as the U.S. eked out modest growth. In Germany, an index measuring business confidence has fallen during the last two months at the steepest rate since 1990. As Europe’s largest economy, Germany sets the tone for the rest of the region.

As for the crumbling British pound, "The U.K. has all of the problems the U.S. has with regard to housing," says John McCarthy, director of foreign exchange at ING Financial Markets in New York.

You get the picture here: The currency markets aren’t bullish on the dollar because they’re bullish on the U.S. economy; they’re just more bearish on a lot of other economies. Money has to be somewhere, so investors and traders always have to be favoring some currencies over others. It’s the dollar’s turn again.

Interesting side note: Things were looking so grim for the dollar a few months ago that the U.S., Japan and Europe had drawn up plans to step in to support the buck if necessary after brokerage Bear Stearns Cos.’ collapse, according to a report today from Japan’s Nikkei English News.