Why the Dollar's Back

The U.S. trade deficit for September: $66.1 billion.

A new record and up almost $7 billion from August. With the U.S. now importing 63% more than it exports, nobody is projecting that the trade deficit will drop below $60 billion a month anytime soon, and for the year, the total could well pass $700 billion, easily trumping 2004's record $665 billion trade deficit.

And yet the U.S. dollar rallied on Nov. 10 in the face of the day's bad news of this soaring trade deficit, and it now stands near a two-year high against the euro, the currency that was supposed to supplant it. And you have to go back to September 2003 to find the last time the U.S. dollar was this strong against the Japanese yen.

Remember back at the end of 2004, when pundits were falling over themselves to predict disaster for the U.S. dollar in 2005? I sure do, because I was one of the folks predicting a dollar decline in 2005. I had seen the error of my ways and reversed my opinion on the dollar in my June 14 column, Why we were so wrong about 2005. So, I was only wrong on the dollar for half a year. But I still never imagined the dollar would post something like a 15% gain against the euro at this point in the year.

A Method to the Dollar Madness

So what's going on? Currencies are supposed to tumble in price when trade deficits climb this high.

There is a logic to the dollar's rally, though. I'll spell it out for you and then tell you how I think this logic will play out for the tail end of 2005. And explain why you should look out for a turn in the dollar's fortunes in 2006. I'll finish with some suggestions on how to profit from the dollar's current strength and the turn I see ahead in 2006.