Why the Dollar's Back

Three reasons explain the dollar's surprising rally this year:

1) The dollar's up because the euro is down.

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?

2) The Fed has made it pay to buy dollars.