The U.S. dollar doesn't have to be a perfect currency; it just has to be better than the competition, the euro. (The yen, given Japan's negative real interest rates, isn't a starter in this race.) And it would be hard over the last six months to find a currency that's suffered more body blows than the euro.

First, there's the France problem. The country's immigrant population has risen up in protest against problems that include 40% youth unemployment, and the French government has shown itself startlingly clueless about how to stop the rioting and fix the underlying problems.

Second, there's the Germany problem. Everyone (well, investors and economists, anyway) got excited that the fall's election might sweep a new government to power with a mandate to transform the country's rigid economy. Instead, the vote went just about straight down the middle, leaving the country to be governed by a grand coalition that doesn't agree on much of anything.

Third, there's the Italy problem. The country's budget deficit is way, way above the rules set by the European Union, and with the Italian economy struggling to grow at all, nobody in Rome really wants to propose budget cuts.

And finally, there's the U.K. problem. The Tony Blair government saw its antiterrorist legislation go down to brutal defeat in the House of Commons on Nov. 9, just in time to undermine Blair's ability, as president of the European Union for six months, to broker a deal on the EU budget. Talks on the budget collapsed in June, with Britain and France at loggerheads.

That's enough to make anyone think twice about buying euros, no?

High oil prices added about $1.5 billion to the trade deficit in September, even as the volume of imported oil dropped by about 2%. The U.S. imported about $23.8 billion in petroleum and petroleum products in September, according to the Bureau of Economic Analysis report. That put a lot of money in the hands of Middle Eastern central banks and investors, who immediately put those dollars (remember, oil trades in dollars) to work earning interest by buying dollar-denominated assets such as Treasury bonds.

The future is likely to bring major changes in direction to all three of the trends now driving the U.S. dollar higher against the euro and the yen. The shift is likely to be gradual. But by mid-2006 -- six to nine months from now is a reasonable time frame -- we're likely to see the dollar in at least modest decline against both the euro and the yen.

It's hard to imagine that, in a year, the political and economic chaos in Europe will be worse than it is now. For one thing, with the EU's four largest economies in one kind of crisis or another, the union has run out of economies big enough to get the financial world's knickers in a knot if they joined the parade down the road to perdition. No disrespect meant, but a crisis in Belgium or Portugal isn't going to alarm many on Wall Street.

Six months from now, the French government is likely to have muddled its way to some kind of reduction in violence, the failures of the German grand coalition will have gone from alarming headlines in the Frankfurter Allgemeine Zeitung to the butt of Berlin cabaret comics. Without the British prime minister in the hot seat, the French will be less interested in publicly humiliating the opposition.

And the interest rate gap between the U.S. and the rest of the world is likely to narrow, or at least stop expanding. The Bank of Japan has started to pave the way for reversing course, with predictions of rising economic growth and joyous proclamations of a return of barely measurable inflation.

Sometime in 2006, the Federal Reserve will stop raising short-term interest rates -- the betting on Wall Street is on an end to interest rate hikes at 4.75% to 5.5%. The lower end of that range is just a December, January and March rate hike away. If the Fed stops raising rates, that will give euro and yen rates a chance to catch up -- or at least stop them from looking less competitive with each passing Fed meeting.

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