For the first time in four years thedollar is participating in a rally that has sent stocks to record highs as traders in the $4-trillion-a-day foreign-exchange market bet the world's largest economy will only strengthen.

The U.S. Dollar Index showed the currency gaining to its strongest level in more than six months yesterday as the Standard & Poor's 500 Index of U.S. shares reached its highest since 2007. That's unusual because the greenback has tended to move in the opposite direction to equities in recent years as investors sought a haven from the global financial crisis, sovereign bailouts in Europe and slower growth.

“This is potentially a clear turning point for the U.S.dollar,” said John Horner, a currency strategist in Sydney at Deutsche Bank AG, the world's top foreign-exchange trading firm as measured by Greenwich Associates. “We're now starting to get toward the point where good U.S. data is good for the U.S. dollar and good for U.S. markets, and that's a quite different scenario to what we've seen over the past few years.”

Eoin Treacy's view Let us approach the question of the Dollar's value from an absolute and a relative basis. A currency's absolute value can only be assessed on a purchasing power basis. In this regard fiat currencies have been deteriorating in value for decades. The trend is unlikely to reverse and may even accelerate. This has intensified the motivation of investors to find assets capable of holding their value. Equities with a record of dividend increases and hard money such as gold have solid credentials in that regard.

No country can indefinitely tolerate a strong currency relative to its peers. When a currency becomes a threat to competitiveness the potential for devaluation increases substantially. Japan and Switzerland offer perhaps the most relevant recent examples. The fact that the Dollar and Wall Street have been rallying together is a positive sign for improving investors sentiment. The USA is probably more willing than some of its peers to accept some currency strength at present but the economy will need to improve considerably before it will be allowed to trend higher on a multi-year basis.

Following a steep decline the Dollar Index has been largely rangebound since 2008 and is currently rallying towards the upper side of its base. If the US economy continues to recover and growth returns to a self sustaining trajectory that will be bullish for the currency and it could break out of its five-year and counting base. However, while it is currently rallying, it will probably be quite some time before one could argue the Dollar is in a medium-term bull market.