Adjusting to the Fundamentals?

It all depends on the state mind I guess but I for one am not surprised by this ...

(From Bloomberg - bold parts are my emphasis)

The dollar rose to a three-week high against the euro after a report showed foreign investors boosted purchases of U.S. securities in October.

The U.S. currency is also heading for its biggest weekly advance since September versus the yen as the report allayed concern international investors would shun U.S. assets because of the nation's trade deficit. The dollar also gained today against the British pound and Swiss franc.

``We are still seeing foreign inflow into U.S. assets,'' said Alan Ruskin, head of international currency strategy in North America at RBS Greenwich Capital Markets Inc. in Greenwich, Connecticut. ``It seems like the U.S. doesn't have a problem attracting foreign investment.''

The U.S. currency advanced to $1.3085 per euro at 12:22 p.m. in New York from $1.3144 late yesterday, reversing an earlier drop on a separate report showing U.S. inflation is in check. The dollar has gained 1.4 percent this week to 117.98 yen, and reached a four-week high of 118.33 yen earlier. It is up about 0.9 percent this week against the euro.

The U.S. currency has gained 0.1 percent this year against the yen. It is still down 9.5 percent versus the euro as investors bet the European Central Bank will lift borrowing costs more than the Fed. 

My comment above about 'state of mind' is important since the fundamentals are exactly what we should be talking about. Consequently, the fundamentals would indeed seem to point to the need for the dollar to depreciate to correct the current account deficit or more specifically as a part of the overall mechanism (a recession?) which forces the US consumers to save more and spend less subsequently grinding down the excess demand typified in the large trade deficit. Yet, as I have tried to flesh out recently, there are another set of fundamentals we would be wise also to take a look at before we go out and hail the major dollar-meltdown. Another point I want to make is about the nature of the recent wobbles in the dollar which flushed a lot of pre-mature comments pointing to a impending re-balancing act (The Economist anyone :)). What we are seeing now is, I think, evidence that the recent dollar slide was driven by the expected narrowing of interest differentials between the FED and the ECB. Remember, that Trichet practically was locked in to raise back in the beginning of this month as a function of the ECB's own discourse. But also as a result of the ongoing struggle between the ECB and Eurozone policy makers and civil society; the ECB could not pause on the back of pressures from policy circles, even if it was the right choice in terms of the economic indicators.