Published: Tuesday, 10 Nov 2009 | 9:48 AM ET

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If the economy is getting stronger, why is the dollar getting weaker?

As the stock market surged anew on Monday and into Tuesday, and the price of gold marched

Michael (Mx5tx) Exchanging Money

ever higher, the dollar took its biggest tumble since July. The American currency sank roughly 1 percent against other major currencies, to its lowest level since the financial crisis broke out more than a year ago.

But the seeming disconnect between the value of the dollar and the value of stocks is, in fact, not much of a disconnect at all. A growing belief that wealthy nations like the United States will forge ahead with efforts to revive economic growth is luring risk-shy investors back into the world’s stock markets. But with interest rates down and government spending up, the dollar is swooning. Many market participants assert that the currency is weakening with tacit approval from Washington policy makers.

While the faltering dollar will make everything from French wine to Korean televisions more expensive for American consumers, it will also make American exports more competitive overseas — a lift for multinational corporations like Caterpillar

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Indeed, shares of multinationals paced a stock market rally on Monday that left some analysts wondering if a new bull market was building. The Dow leapt 203.52 points, or 2 percent, to 10,226.94, its highest level since October 2008. The broader Standard and Poor’s 500-stock index rose 23.78 points, or 2.2 percent, to 1,093.08. The Nasdaq composite index was up 41.62 points or 1.97 percent, at 2,154.06. And Asian markets opened strong Tuesday, with Japan’s Nikkei index rising 1.3 percent.

If the stock market seems volatile lately, that is because it is. Since early September, the Dow has surged or plunged more than 1 percent during 18 separate trading sessions.

But while stocks seem to have regained their footing — the Dow industrials are now up 16.5 percent for the year — the dollar, once quite literally the gold standard of world currencies, is in retreat. The dollar has lost 16 percent of its value since March. It was hovering around $1.50 against the euro Monday.

In the “bad news is good news” paradigm of Wall Street, the dollar’s fall against nearly all the major currencies reflects the growing belief that major governments will keep interest rates low into 2010 and increase spending to revive growth. A weekend communiqué from the finance ministers of the Group of 20 wealthiest nations offered little support for the dollar: the G20 affirmed its support for keeping stimulus efforts in place but was silent on the dollar’s prospects.

Some investors read the statement as a sign that governments would let the dollar weaken more, without intervening in the currency markets.

“It was a deafening silence, another excuse to investors to keep selling the dollar,” said Brian Dolan, chief currency strategist for Forex.com. “A lot of it is sentiment-driven, and there the dollar is getting a vote of no confidence.”

A currency is usually regarded as a barometer of a country’s economic conditions. The stronger the currency, the thinking goes, the stronger the economy, and vice versa. But while a precipitous decline in the dollar might wreak havoc in the American economy and the markets, a moderate decline does not seem to be a big worry for Washington. Indeed, many economists contend that a devalued dollar helped the United States recover from the Great Depression.

As the dollar has fallen recently, the price of gold, which has been on a tear in recent weeks, surged to yet another record. The metal reached $1,103.65 an ounce in late afternoon trading. Its price has fluttered at record highs lately amid a frenzy for it by hedge funds and wealthy speculators. Other commodities also rose, with the price of oil flirting with $80 a barrel.

Rock-bottom interest rates in the United States have cemented the dollar’s reputation as a low-yield investment. Last week, in assessing the overall health of the economy, the Federal Reserve gave no indication that it planned to raise interest rates in the near future, stirring concern over inflation and prompting investors to reroute their funds toward gold, oil and the stocks.

“When you have zero percent inflation, zero percent interest rates, zero percent money markets rates, and when you have metals and gold that have skyrocketed to astronomical levels, stocks look pretty good in comparison,” said M. Jake Dollarhide, chief executive of Longbow Asset Management in Tulsa, Okla.

But for some investors, a swelling budget deficit and low interest rates are a recipe for future inflation, which would erode the dollar’s value further.

In the midst of the crisis last year, investors the world over flocked to havens like United States Treasury notes. But now, with confidence growing about the global economy, many are shifting funds back into stocks, including many emerging markets. Brazil’s stock market, for instance, has jumped more than 11 percent in the last five days.

“If the world continues to heal, and investor confidence continues to rise, you will continue to see money leaving the safe, liquid arms of the U.S. Treasury and going back overseas in search of better returns and higher yields,” said Rebecca Patterson, global head of foreign exchange and commodities at JPMorgan’s private bank.

Policy makers, meanwhile, may face pressure to intervene if the dollar plunges too rapidly. But in the short term, they may see political and economic benefits in a slow but steady depreciation of the currency: a falling dollar could push up exports and send customers at home flocking to American brands.

The Treasury’s 10-year note rose 3/32 to 101 4/32. The yield fell to 3.49 percent, from 3.50 percent late Friday.

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