Investors took an especially bearish view on the Dollar, in the months leading up to the expansion of the Fed’s Quantitative Easing Program QE2, precipitating a rapid and steep decline against most currencies. Analysts argued that QE2 would be ineffective in the short-run and inflationary in the long-run, and that most of the new cash would be invested abroad.
The Dollar has rallied strongly, since the unveiling of QE2. Most economists remains skeptical that it will do much to lift GDP and boost employment. However, a parallel thread holds that this was only the ostensible motive for QE2, and that the real motive was to prevent the outbreak of another financial crisis and consequent economic downturn.

While the stock market rally has stalled, the rise in Treasury Yields has not. The 10-Year rate is close to 3% for the first time in months, making it more attractive (and less costly) to hold capital in Dollar-denominated assets. The Dollar was helped by the release of GDP data for Q3, during which the US economy beat expectations and grew by 2.5%.

Analysts have revised their forecasts to reflect a stronger Dollar, based on the notion that “The dollar has found a bottom.” To be sure, there may be other reasons for the Dollar’s rally, namely the growing turmoil in the EU. Evidence is mounting that the EU sovereign debt crisis is spreading, which has spurred both an increase in investor risk aversion and a decline in the Euro. Still, market chatter seems to be focusing less on the Dollar as safe-haven and more on the fact that the Dollar was merely oversold.

On a purchasing power parity (ppp) basis, the Dollar is starting to look cheap. If the opinions of Europeans, Canadian, Australian, and Japanese tourists are to be taken at face value, the US is cheaper than it has been for years.