The US dollar's long decline may finally be coming to an end.
More investors—nervous about the global economic recovery and skeptical about how much further stocks can rise—are beginning to turn to the dollar as a safe haven. That has boosted the dollar's value in recent days and led to speculation that the rebound may continue, regardless of what the Federal Reserve does with interest rates.
Ironically, the shift in sentiment was triggered partly by Friday's better-than-expected employment report, which served a dual purpose: it reinforced the notion that the job market is still tight but raised fears that the Fed could start raising interest rates again.
The rising dollar has sent both stocks and commodities lower. And analysts see stronger signs that investors are moving away from those more risky investments and into the safety of the dollar and US Treasurys.
"There is this market focus slowly shifting potentially to see more risk down the road, and markets are getting thinner towards year's end," says Bryan Rich, currency analyst for Money and Markets and a dollar bull. "For markets in general this whole risk trade has been so highly correlated that when you get a pullback that tends to affect everything."
Signs over the past few days that there could be significant troubles in the global economy have added to the dollar's appeal after six months of decline for the greenback.
Standard & Poor's issued a stern warning about Greece's debt, while Moody's countered with its own cautions that the US and UK also could lose their triple-A status should their economic houses remain in disarray.
Additionally, analysts warned about the reorganization plan for Dubai World, a credit crisis of its own that sparked global worries during the Thanksgiving holiday week.
Such uncertainty tends to push investors to search for safe spots to park their money, and the dollar would be one popular alternative.
"There's a safety trade involved when people get more fearful of the economic trends, and the dollar gains strength," says Rodney Johnson, portfolio manager of the Dent Tactical Fund ETF. "It has nothing to do with how they're treated. This is a better idea than putting it to work."
The Dent ETF is an actively managed fund whose biggest holding is the SPDR Barclays 1- to 3-month Treasury bill ETF.
Johnson said the dollar play will work now for investors even if the turnaround is more aggressive than consensus estimates. A stronger recovery, he says, will incite the Fed to raise rates, which also will help the greenback.
But he's in the camp of those who see the dollar gaining as a safe haven against weakness.
"Unfortunately, the equity market has run up a lot on the hope of what will be a strong recovery. We have pumped a lot of money in here to keep things buoyant, but it's not going to work," Johnson says. "After we get past this run in foreclosures and defaults and we get into 2010, we're going to see dollar strength and see the equity market come back in."
There is some contention over the duration of the dollar's strength. Some analysts see a doveish Fed as undermining long-term strength of the currency.
"The short-dollar trade had gotten awfully crowded but I still think that ultimately the fundamentals are in place for the dollar decline to continue," says Dirk van Dijk, analyst at Zack's Equity Research, adding that the stronger dollar "can certainly go on for a few more weeks" but won't last unless there is some other type of global economic crisis to shake markets.
At the same time, though, the strong dollar gets support from those who think the economy is in better shape than expected.
Peter Cardillo, chief economist at Avalon Partners in New York, thinks the Fed might get more aggressive in controlling rates, despite Chairman Ben Bernanke's remarks Monday.
"The Fed is going to surprise the markets by raising interest rates sooner rather than later," he says. "The economy is going to grow at a faster pace than the market is expecting."
Even if that happens, dollar investors can benefit.
"We have a lot of structural issues. Risk aversion will come back and come back severely and the dollar will benefit from it," Rich, the Money and Markets analyst, says. "Even if you believe the recovery story, you should probably still be buying dollars."