 Foreign exchange markets sense a change in the global economic climate |
The US dollar is making a comeback as sluggish European economies and falling oil prices make the outlook for the world's largest economy seem better.
The greenback hit a six-month high against the euro on Friday, after earlier data showed the eurozone economy shrank in the second quarter, adding to fears that the region may be heading towards recession.
Meanwhile the Bank of England issued a gloomy assessment of the UK economy.
That has caused the pound to fall against the dollar for an 11th consecutive day.
What is driving the dollar?
The US has been seen as the worst hit by the recent slowdown, but there has been promising news recently from the world's biggest economy.
A surge in June's export sales and rising industrial output in July have made economists more optimistic about its outlook.
This, coupled with news that economies outside the US are doing badly, has led to a rise in the dollar as foreign exchange markets sense a change in the economic climate.
The dollar's climb against the euro was triggered after the head of the European Central Bank (ECB), Jean-Claude Trichet, reiterated his fears about the health of the eurozone economy earlier this month.
Many analysts expect the ECB and the Bank of England to cut rates in a bid to boost their flagging economies.
So if US rates head in the opposite direction, the shifting interest rate gap should also boost the dollar, as the euro and sterling become less attractive to global investors.
The oil factor?
But commodities - namely oil - also have a part to play.
The recent fall in the price of crude oil has helped the US currency because the US, the world's biggest oil consumer, has most to lose and least to gain from sky-high oil.
When oil prices rise, the dollar traditionally weakens.
But a lower oil price helps tame inflation, helping revive consumer and business spending and so kick-starting the wider economy.
Will the greenback rally last?
If the US economic picture continues to improve and oil keeps falling, analysts say the rally will be supported.
Goldman Sachs, the largest US investment bank, said it believed "the dollar's long-term downtrend had ended".
After a decade of taking a negative view on the dollar, the bank said it was waving "goodbye to our long-held dollar bearish stance".
Still, the dollar faces challenges ahead, such as volatility in oil prices and weaker US consumer spending.
Investors will also be looking at the giant emerging economies of Brazil, Russia, India and China - key drivers of this decade's global expansion.
If cracks start to appear in the economies of the emerging world, that too could determine the extent of the dollar rally.
Why does the currency change matter?
American tourists in Europe have bemoaned the weak dollar and how it has reduced their purchasing power for years.
Europeans crossing the Atlantic have enjoyed a spending spree fuelled by the strong euro.
These factors will change slightly, analysts said.
On the upside, European exporters will benefit as their goods will become cheaper overseas.
And institutions holding large reserves of of dollar assets, such as Asian central banks, will be breathing a sigh of relief with the current direction of the dollar
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