While U.S. economy weakens, U.S. dollar strengthens

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One of the few things going up since the financial meltdown began? The U.S. dollar.Around midyear, as the credit crisis intensified, the dollar ended its seven-year losing streak and started rising against most currencies except the Japanese yen, which is soaring for reasons I'll get to below. Since June 30, the greenback is up 26 percent against the euro, 28 percent against the British pound and 59 percent against the Australian dollar.Looking at it another way: On July 15, the euro hit an all-time high of $1.599 and people were speculating about whether it might rise to $2.Today, the euro buys only $1.25, and people are wondering if it could fall back to $1, or parity, with the dollar.What's behind the dollar's turnaround, and what does it mean for the economy, consumers and investors?Early in the year, the dollar fell on fears that the United States was heading into a recession. Around midyear, it became apparent that the rest of the world was also slowing and the dollar started appreciating against other currencies."Currencies reflect relative economic strength," says Vassili Serebriakov, a currency strategist for Wells Fargo.As the crisis intensified, the dollar started rising far another reason: a flight to quality."The world is pulling out of risky assets and putting it into safe assets, and U.S. Treasurys are still the ultimate" safe harbor, Serebriakov says.To buy Treasury securities, overseas investors must buy U.S. dollars, and that boosts its value."It's a panic flight," says Axel Merk, manager of the Merk Hard Currency fund.Some say the dollar is also strong because the United States has taken an earlier, more aggressive approach to solving the financial crisis than other countries."The ability of the U.S. to find a unified solution to the credit crisis is a huge positive," says Andrew Busch, a currency strategist with BMO Capital Markets.In a note to clients this week, Wall Street strategist Ed Yardeni wrote, "The strength of the dollar is a bit ironic to say the least. Over the past year, around the world, there was schadenfreude -- a sense of satisfaction in America's comeuppance. "Our smug self-confidence in free-market capitalism irked lots of folks around the world, who preferred doing business their way. So what are they doing now? They are fleeing their currencies and buying U.S. T-bills as the only safe haven."A stronger dollar might be good for America's image, and it's great if you are traveling overseas, because your dollars will buy more in most countries.But the stronger dollar also makes American-made goods more expensive overseas, and that will hurt U.S. companies that get a lot of revenues from abroad."U.S. growth was positive in the first half (of 2008) thanks exclusively to exports," says Serebriakov. A weaker export sector will hurt the fragile U.S. economy.On the bright side, a stronger dollar makes imports less expensive, and that will help keep a lid on inflation in the United States. But for now, growth is a bigger concern than inflation.The rising dollar is also clobbering investors who own mutual funds that invest overseas.In recent years, U.S. investors poured money into foreign funds without realizing that a lot of their gains were coming from the dollar's long-term slide.If a fund invests abroad and the dollar subsequently falls, it realizes a currency gain when it converts income or capital gains earned in a foreign currency back into dollars. These currency gains fatten a fund's performance.This year, the opposite has been true. When the dollar started rising, currency gains turned into currency losses when funds repatriated their money. These losses added to the pounding most funds are taking on their foreign-stock investments. How long the dollar continues rising is anyone's guess. Exchange rates are notoriously hard to predict, but some strategists say that as long as stock markets remain volatile, investors worldwide will continue to favor U.S. Treasurys and that will bolster the dollar."A stock market recovery will be a sign that some of the strains are easing, that will take upward pressure off the U.S. dollar," says Serebriakov.BMO's Busch says investors interested in currencies should pay close attention to a Nov. 15 meeting in Washington, D.C., of leaders from 20 nations. The session is being called a "new Bretton Woods" after the 1944 meeting that set up a new global structure for finance in the post-World War II era.(Distributed by Scripps Howard News Service, www.scrippsnews.com.)