Trying to get a grasp on the factors that drive currency valuation and what can be done to strengthen the US dollar (if indeed it shoud be strengthened) against other countries currencies is not easy. There's a lot of confusion and misinformation swirling around on this. In yesterday's Wall Street Journal, Alan Reynolds tried to bring a little clarity with a piece on Interest Rates and Dollar Fundamentals (sub req):
The spectacular rise of the Canadian dollar was more closely tied to the price of oil than to interest rates, although the Bank of Canada did raise interest rates in July, just before the Fed began nudging rates down.
While prices of oil and gold were soaring, exporters of oil and gold such as Canada could trade their wares for more U.S. technology and services. Such improved "terms of trade" typically raise the global demand for the assets of commodity-producing countries and thereby raise their currencies.
Other commodity exporting countries, such as Australia and to some extent the U.K., also see their currencies rise whenever the price of their exports rises faster than the price of their imports. Trade deficits have nothing to do with it. Australia's current account deficit is a bit larger than that of the U.S., as a share of GDP, and Britain's deficit is not much smaller.
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