Dollar's strength shows faith in U.S. economy

— -- Q: Why is the dollar increasing in value against most other currencies, even when the U.S. stock market is going down the tubes?

A: When the stock market is falling, it's easy to think all is lost. This bear market has been especially tough. Stocks have lost value precipitously, along with other assets, such as homes and corporate bonds.

But one of the bright spots about our economic system, despite being stressed and on life-support, is it's ability to adapt and recover. The value of the dollar is an example.

For instance, when the U.S. economy started to struggle late last year, the value of the dollar sank. The weaker dollar threw U.S. companies a lifeline by making their exports less expensive and more price competitive in other parts of the world.

Now, the dollar has been strengthening. The dollar rallied more than 17% against the pound and the euro the three months ended in late October and 30% against the Brazilian real. There are three reasons, according to research from State Street Global Markets.

First, despite its problems, the U.S. is still considered a financial safe haven. Investors in other nations hoping to preserve their cash are buying U.S. Treasury securities, which requires them to buy dollars to do that.

Second, U.S. investors who sold dollars to buy stock in companies in emerging markets want their money back. To get their money back, these U.S. investors sell the foreign stocks and convert their foreign currency to dollars.

Finally, large investors who have been betting against the dollar are beginning to unwind their trades, which may require them to buy dollars.

The dollar's relative strength shows, in some ways, the U.S. may be further along in the financial crisis. Despite the huge black eye the U.S. has suffered, it's still viewed as a safe haven. Hopefully this will bode well as the nation tries to repair the economy and its standing in the world.

But the dollar faces major setbacks in the intermediate future. Interest rates in the U.S. are low and likely falling, which will make the currency less attractive. And there's the overhang that the government is going to need to borrow heavily to pay for the financial bailout packages that seem to be announced each week.