Betting on the American Dollar
An Essay by Paul Podolsky

Nov. 8, 2001 -- You could find evidence of the dollar's strength in all kinds of places. On a recent trip to Kaliningrad, Russia, I watched young men work the street corners, eager to sell their wads of rubles for dollars. Given how bleak the news has been in the United States, it's easy for us to forget what a beacon of hope we are for the rest of the world.

The best gauge of that is the enduring appetite to hold our currency. Though the Nasdaq stock market index has fallen by almost 30 percent this year, the U.S. dollar has actually appreciated. Against Europe's common currency, the Euro, the dollar is now up 5 percent higher than at the beginning of the year and steady since 9/11.

"Investors around the world seem convinced the United States will bounce back and that consumers here are more resilient than their counterparts in Europe and Japan." Paul Podolsky

It's the same story with other major trading partners, like Canada or Japan. This is significant. It means currency traders in high-tech offices from New York to Singapore like the dollar as much as black marketeers in Russia. Currency markets are open 24-7. They provide a constant referendum on policy and economics that's more reliable than any poll.

Why has the dollar gone up? The simplest answer is that investors abroad continue to buy things denominated in dollars: stocks, bonds, factories, whatever. Interestingly, the Federal Reserve has been cutting short-term interest rates all year in an effort to stimulate a slowing economy.

In textbook economic theory, lower interest rates and slow growth reduce the dollar's value, but instead the dollar is more than holding its own. Investors around the world seem convinced the United States will bounce back and that consumers here are more resilient than their counterparts in Europe and Japan.

To be sure, terrorist attacks and stock market bubbles aren't easy to shake off, but the jaded characters on Russia's black markets and their more well-heeled canon trading rooms are betting that we'll do just that.

Paul Podolsky is chief foreign exchange strategist at FleetBoston Financial.