Daniel Drezner notes that technical investors have had their way with the U.S. dollar this year pushing it up 10% versus other major currencies. Fundamentalists on the other hand are nearly unanimous in their belief that the U.S. is fundamentally overvalued and needs to correct in part due to the massive budget and capital account deficits. The Buttonwood column Drezner cites at the Economist.com has some of the reasons why the dollar may be ahead of its fair value. New Fed chair Bernanke could have a key role in what the dollar does:
So though many on Wall Street have raised their forecasts of where the dollar will be trading three to six months from now, fewer are as sanguine about the outlook in a year’s time. Much will depend on how Mr Bernanke handles his inheritance and how he is perceived to handle it. He has received a rare unanimous welcome from economists and politicians and, tellingly, from former students. But only time will tell whether he is as tough on inflation as his predecessor (who perhaps talked a better game than he played). He may well find the federal-funds rate at 4.25% when he takes office: high enough to do damage if the next move is the wrong one. For now, he has won the prize, and the plaudits. But he has miles to go before he sleeps.