The value of the U.S. dollar on foreign exchange markets hit new highs last week against a number of currencies, including the British pound and the French franc. It was a classic case of commodity traders getting out of the way of a steamroller.
That is how to begin understanding what is happening to the dollar: It is a commodity just like wheat or copper or pork bellies.
Around the world, some people who have dollars want or need to exchange them for other currencies -- to pay for goods bought in another country for export to the United States, to make an investment in that country, or possibly just to speculate.
At the same time, others want or need the dollars the first group wants to sell. The buyers and sellers can be almost anywhere in the world -- citizens or institutions or businesses in the same country, or in different countries.
In April 1983 -- the last time that anyone tried to check -- the New York Federal Reserve Bank found that a net of about $26 billion worth of dollars was being exchanged for foreign currencies each day in American markets, primarily New York City. The daily figure undoubtedly is higher now.
There are also major foreign exchange markets in London, Frankfurt and elsewhere, and futures contracts that allow someone wishing to buy or sell dollars at some future time, to do so at a price set now.
With this volume of transactions, it is impossible for anyone, any business or even any government to peg the price of the dollar relative to other currencies. Governments sometimes try to push up the value by buying dollars, or push it down by selling them. But lately no one has had much luck doing that. Just about everyone who has expected the value of the lofty dollar to fall has lost money. Now the old rule of the commodity trade -- don't buck the market -- has turned into an iron law for the moment.
There are many reasons to buy dollars. With interest rates high in the United States relative to inflation, U.S. investors are keeping their money at home and foreigners have stepped up investment here.
And to an increasing degree, dollars have become the currency of world trade, and that also requires more dollars. All this adds up to more dollars being demanded than are available -- at a given price. In response, the value of the dollar goes up until buyers and sellers can get together.
Of course, the process can be very messy. If no one can buck the market until it is clear to most of the market players that it is about to reverse direction, that reversal can be sudden and overwhelming. The steamroller can start running in the other direction.
The high value of the dollar has made imports relatively cheap, and has hurt U.S. exports. The big net inflow of foreign capital has helped to hold down interest rates and has made financing the federal budget deficit easier, while wiping out a foreign investment advantage the United States has enjoyed.
A reversal of the dollar's course would reverse those effects, adding to inflation and boosting interest rates -- but with a lag, also helping to limit imports and making American goods easier to sell abroad.
When will that happen? When will the dollar begin to lose some of the huge increase in value it has had since 1980? Well, nobody knows. That's what commodity trading is all about.