Nowadays, whenever a sense of stability—normality—returns to foreign exchange markets, they send the dollar down across the board.
Because the Fed is printing dollars as part of QE2 (quantitative easing)—and that means America will not raise benchmark interest rates, even when the rest of the world is starting to at least talk about it.
The weak housing data is adding to the gains. But this broad dollar retreat is setting up a potential contradiction on Europe.
Not only is the Euro making gains—this morning it's importantly broken key resistance at 1-$-35.
But, it's happening at a time when pressure on the PIIGS is starting to mount again. Last week's direct bond buying by the ECB and general optimism drove down the extra the market demands to hold Greek debt over benchmark German bunds. Now they're starting to rise again.
Despite earlier denials from the Greek and German governments in response to newspaper reports, Reuters confirms that the Germans are working on contingency plans for a Greek default—possibly giving Athens the right to buy back its own debt using one of the euro zone crisis funds.
Longer-term, any solution would be a boon to the Euro. But the political flaying around it would probably take to get there is unlikely to be Euro positive.