How the Dollar Could Rally

There's a Wall Street maxim that the national news magazines often make great contrarian indicators. With a cover story titled "The Incredible Shrinking Dollar," the latest issue of Newsweek, therefore, provides an opportunity to ask a question that very few observers seem willing to contemplate: What could cause the dollar to rally?

Dispensing with the preliminaries, I'm aware of the dollar's long-term structural deficiencies, namely the current account and federal budget deficits. With the so-called twins seemingly getting bigger by the day, and more foreign central banks using the dreaded D-word ("diversification"), it is very hard -- if not impossible -- to make a long-term bullish case for the greenback. Indeed, we may be witnessing the early stages of the dollar losing its standing as the world's reserve currency.

But bear markets are often interrupted by ferocious rallies -- nine of the Nasdaq Composite's 10 biggest percentage gains occurred during its 2000-02 swoon -- so it's wise to consider some potential catalysts for a significant intermediate-term advance in the beleaguered buck.

"If there's going to be real strengthening of the dollar, it has to come from money leaving Europe" and the euro, says Dennis Gartman, publisher of The Gartman Letter.

The trigger for such a move may have arrived Friday when an opinion poll showed, for the first time, a majority of French citizens oppose the European Union constitution, on which they'll vote May 29. In recent trading, the euro was at $1.3282, vs. $1.3374 late Thursday.

The Dutch vote on the constitution on May 26 and a rise in opposition sentiment in either country could be "the next tipping point" for dollar/euro trading, Gartman says. "What happens if the Dutch or French vote down the constitution? Suddenly the EU ceases? It will be shocking to Europe."