Why the Dollar's Back

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.

From U.S. Homes to Saudi Hands

The shifts in these two trends won't send the dollar into a tailspin unless the great U.S. real-estate ATM seriously flags in 2006. The global flow of dollars currently goes from real estate-rich U.S. consumers, via gas pumps, to the portfolios of Middle East (and other oil-exporting) nations and then back into U.S. Treasuries.