Fed's dollar strategy still in doubt

The recent currency's surge runs counter to conventional wisdom. Many would expect QE2 to debase the US currency with central banks around the world struggling to diversify to a basket of currencies. However, there are theories to support the currency's recent surge:

1. Market participants could be unwinding the carry trades - in which the purchase of riskier, higher yielding assets is funded by selling low-yielding currencies - and covering short positions.
2. Market participants could have be having the expectation that the economy is recovering with QE2 as the Fed has hoped.
3. With the health of the eurozone in doubt, investors have been selling the euro and pushing the yields on the debt of weaker European countries sharply higher this week, boosting the dollar.
4. Imposition of capital controls by the emerging economies could be another explanation.