It's probably not the obvious: "The dollar's strengthening as of late is more about Russia than Draghi," said Axel Merk, chief investment officer with Merk Investments LLC. "The Ukraine situation is destroying confidence in the European recovery, and more sanctions against Russia will hurt Europe as well."
I will give it a try. Dollar strength will ultimately be driven by and improving US economy in contrast with weakness in the Europe ultimately resulting in higher comparative rates. Given Europe (ECB) is signaling more QE (and Japan is widely thought to follow suit), yields on the bund have continued to fall (US yields have fallen as well; however, the spread on the Treasury-Bund has widened). This is in contrast to the US which is going to continue tapering and ultimately end QE in the coming months. Improving economy and ending QE should ultimately be good for the USD (in contrast to Europe and elsewhere). As a secondary matter, turmoil (Middle East, Russia/Ukraine, etc.) around the world should bolster the dollar relatively speaking due to a flight to safety bid.
From my perspective US economy and dollar simply stabilized and it's more weakness of others than dollar's strength. EUR is 57% of the basket and in my opinion it really looks horrible. Interest rates are so low EUR basically can be called carry currency now (which is negative for it during risk on). Privilege to deposit money in ECB now cost money to banks (negative interest rate)! And Yields are so low its hard to find a reason to park capital to some Italy bonds when US treasuries pays the same or more. Unemployment in Spain is freaking 20%! France, Italy ~11%. This creates expectations that EUR should drop further which make carry trade and US markets over Europe even more attractive which creates even more capital flight from Europe which make carry more attractive... In my opinion ECB monetary policy can't do much more because new money created with QE probably would end up invested in Germany anyway. Without some reforms to remove inefficient socialism/to lower taxes/to lax regulations in Spain/Italy/France new money wont help with new investments and jobs creation in those countries. Maybe that's why ECB started this experiment with negative rates. On top of that there is this situation with Russia. US markets pretty much safe even in unlikely scenario of big war. And strict sanctions and economic warfare is really hurting some European companies which on top of general economic weakness creates even more capital flight from Europe stock markets. And it probably goes to US (thus USD up). So it is likely that EUR just have to correct itself to make EU more competitive. JPY is ~14% of the basket and I guess they just have to do something about their huge debt and economic stagnation. However because GDP failed to grow as expected all this stimulus is probably viewed as inflationary by investors. And it probably is. It makes sense - inflate currency, stabilize, raise taxes, inflate currency a bit more, raise more taxes etc (which I think is again on the table at least I've read about more tax raises). Limit on yen weakness is probably set only by oil prices since Japan buys energy from outside and yen too weak would cause trouble there. JPY is also carry currency. Other than that I don't know much about Japan. GBP - I have no idea. Maybe Europe is dragging it down. Maybe fear of Scotland referendum. Maybe it just overextended and market expected much more from UK economy. However price action is extremely weak maybe there is something more to it. And US economy now looks pretty healthy QE 3 is ending, rate hikes are expected soon, shale revolution makes US more independent (huge for economy) and that could make dollar again real petrodollar Oil prices getting low - dollar strong. Dollar strong - gold cheap. And probably it again starts some kind of cycle of capital reallocation which fuels breakout. That's my humble opinion about what's going on, of course it's hard to know for sure. I am really interested what others think about that.
So far, not the answer I was looking for. That is not to say anyone is completely wrong. Some of you guys are really over thinking this.
Funds flowing to US equities and bonds. With yields expected to rise, that would be bullish for the dollar.
Yes, but think bigger. Funds can flow to all sorts of equity markets. Hell, the US is not even in the top 10 returning equity markets this year.
Liquidity taken when it can be? Taper, tightening, disinflation, deflation, unwinding risk, are all flashing in USD,Gold,Oil,Bonds. Does not match a lot of US economic data spewing forth. But, if the market is a discounting mechanism reflecting forward prices and forward conditions today then that may begin to explain it. Thats my best shot. I would have said what the others said if i could!
Only other factor that comes to mind is the shale oil effect. Domestic oil surplus will be positive for the balance of payments, and with exports it will be even stronger.
The US is just a few years away from being the largest producer of oil in the world and is currently producing the most oil since the 1980's. The US is officially a commodity currency and our dollars are now backed by hard assets. In the next two to three years we will be flooding the world with oil and all that oil brings demands for dollars. And let's not leave out LNG which will begin flowing in 2 years.
Here is an interesting read about the FX landscape at the moment. http://www.zerohedge.com/news/2014-09-03/citi-warns-every-fx-trade-same-carry-trade-now