ACROPOLIS NOW
Some argue the dollar's recent rally against the euro and yen (it's up almost 6 percent against the Japanese currency since December) is less a vote of confidence than a realization that it's simply the best of a bad bunch.

Per Rasmussen, a retired currency trader who worked at Chase in the late 1970s in London, called it a "reverse beauty pageant" in which investors pick the "least ugly" contestant. Since rising above $1.50 in November, the euro has tumbled more than 10 percent and was last changing hands around $1.3550, near a nine-month low.

The currency has been battered by doubts about whether Greece and other wobbly euro zone economies can manage the spending cuts needed to rein in out-sized budget deficits. The worries have weakened confidence in the whole concept of European monetary union.

And:

Merk, whose $550 million Hard Currency Fund is designed to profit from a steady dollar decline, said he believes Washington is banking on a gradual dollar devaluation to shrink its monstrous debt and fuel an export boom to propel the economy.

"Now I am convinced that (U.S. authorities) consider a weaker dollar the solution to many of their problems. But you can't turn your policies upside down and expect the rest of the world to put up with it forever."

And:

What's clear is that America's debt-holders aren't the passive, pliant bunch they used to be. Some of the biggest holders of U.S. dollar assets are also among the fastest growing economies and they are hardly bashful about criticizing U.S. policies, particularly now that the financial crisis has eroded America's influence and its reputation for sound economic management.

China alone holds $2.3 trillion in foreign exchange reserves, with nearly $800 billion in U.S. Treasury debt. And at a press conference last year, Premier Wen Jiabao did not mince words: "We have lent a massive amount of capital to the United States and of course we are concerned about security of our assets. To speak truthfully, I do indeed have worries." Terrence Checki, who has acted as the Federal Reserve Bank of New York's chief international trouble-shooter for two decades, warns that the U.S. cannot afford to ignore such concerns.

"We are no longer alone as the central axis for the global economy," he told a gathering of influential bankers and policy-makers during a Foreign Policy Association dinner at New York's St Regis hotel in December. That, he added, implies "recognizing that our leverage will not be what it once was. We also need to be attentive to the messages we receive, such as rumblings about the dollar and our policies and priorities, even when we disagree with them."

History suggests that a currency is supplanted the same way Ernest Hemingway said a man goes broke: gradually, then suddenly. In terms of economic might, the United States surpassed Britain in the late 19th century. But it took another 60 years and two world wars to strip sterling of its reserve status.

Even so, some worry time is not on the United States' side. Emerging markets already account for roughly half of global output and that share is rapidly increasing. In 2003, Goldman Sachs said the size of China's economy would surpass that of the United States by 2041. Five years later, it revised the forecast to 2027. China is expected to surpass Japan as the world's second largest economy this year.

All of which would be fine were it not for the fact that the United States continues to live beyond its means. The recent spike in borrowing and spending following the financial crisis is creating a debt burden that, in the word of Moody's Investors Service, is trending "clearly, continuously upward."

David Fuller's view Several years ago, an economist who is also an investor and subscriber well known to me, referred to the US dollar and sterling succinctly and brutally accurately as: "Begging-bowl currencies."

I maintain that the US dollar only has 'safe haven' appeal for a large and influential number of investors when they seek temporary haven from so called 'risk assets' during times of crises, perceived or real. The most obvious and comparatively recent real example was during the global meltdown in the second half of 2008.

Do we have a real crisis today? It is real enough for Southern European countries and obviously heightens sovereign debt concerns from Greece to the USA via the UK, but is this another global crisis? I do not think so, at least not yet although the OECD countries' problems are far from resolved.

Meanwhile, investor ennui regarding stock markets has been increasing since last year's blistering rally lost upside momentum. This could hardly be considered a real crisis although it might possibly feel like one for some investors if the 200-day moving averages for major stock market indices are decisively broken over the next few months. Today, they are holding and some indices have firmed, albeit within ranges, following their mean reversions to the MAs.

I regard periodic strength in the US dollar as a response to the perception that risks have increased, rather than a lead indicator. In other words, investors shelter beneath a US dollar umbrella when it rains, but use the greenback as a carry trade currency when the sun shines. When confidence returns to stock markets, I expect the greenback to be in retreat. We should see it first in the US dollar price of gold and against the Asian Dollar Index. (See also additional currency comments below.)