Why’s The Dollar So Strong?

Posted by By Brad Zigler on Thursday, February 26, 2009 Under: Forex Economic Data
real-time Inflation Indicator (per annum): 7.5%

Was anybody surprised by the Yankee dollar’s wobble Monday? With a zombie stock market lurching about and the price of gold rising, you’d think that the greenback would be moribund. Not so.

The dollar’s purchasing power, measured against gold and the world’s second reserve currency, the euro, has in fact improved recently. More accurately, the buck’s erosion has slowed.

That’s reflected in our real-time inflation indicator which has diverged lower as gold has risen.

Monetary Inflation Declining

Gold_Inflation

Another way to describe the phenomenon is “disinflation.” We don’t get to “deflation” until we’ve finally wrung out the effects of previously embedded inflation. Not that you’d actually want that.

So, what sort of prestidigitation keeps the dollar levitating?

There’s no magic. Unless you consider the catch-up game the euro’s playing to be slight-of-hand. Check out the price of gold in dollars and euro.

Gold Price At Parity

GoldSpot

The European Central Bank’s been forced to abandon its hawkish inflation stance, forcing the euro and dollar into lockstep. America’s inflationary excursion versus the 16-nation European currency has seemingly come to an end. The advantage euro users once enjoyed has evaporated.

The question before traders and investors now is how the euro will fare as a reserve holding.

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