All of a sudden, the world wants dollars again

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Maybe you can start dusting off those overseas vacation plans, after all: The beleaguered dollar suddenly is on a hot streak.

The greenback is rallying today against the euro, the yen, the Canadian dollar and other major currencies, lifting a closely watched index of the dollar’s value to its highest level since February.

The DXY dollar index, which measures the buck’s moves against six key currencies, was at 74.13 at about noon PDT, the highest since Feb. 27. The index has jumped 2.4% this week, a big move compared with its usual shifts.

The euro has slumped to $1.535 today from $1.542 on Thursday. The European currency peaked at $1.599 in mid-April.

Just a week ago the dollar was hammered by the government’s report of a jump in the unemployment rate in May to 5.5% from 5%. Anything that dims faith in a country’s economy usually is bad news for its currency.

But this week, sentiment toward the buck has rebounded sharply -- although not necessarily for reasons that will make average Americans feel good.

One factor is the growing belief that the Federal Reserve will begin raising short-term interest rates this fall to combat inflation. The Fed has encouraged that idea with tough talk on inflation, including a throw-down-the-gauntlet speech on Monday by Chairman Ben S. Bernanke.

‘There has been a pretty significant shift in expectations on rates,’ said Kathy Lien, currency strategist at DailyFX.com. Higher interest rates could attract more global investors to U.S. bonds, underpinning the dollar.

Today, although the ‘core’ rate of inflation in the government’s May consumer prices report remained relatively tame, Treasury bond yields are mostly higher after dipping early in the session. That’s a sign investors continue to bet on a credit-tightening move by the Fed later this summer or early in fall.

The dollar also is getting a boost today from a blow to the euro’s image, after Irish voters rejected the European Union’s new governing treaty -- raising new doubts about prospects for greater political unity to tackle Europe’s problems. Bloomberg has a good story here.

The Irish vote ‘weakens the appetite foreign investors have for euro-denominated assets,’ said Michael Woolfolk, currency strategist at Bank of New York Mellon.

For the Bush administration and the Fed, almost anything that strengthens the dollar is welcome at this point, because a healthier buck could put downward pressure on prices of oil and other commodities, as I explain here. Crude oil today is trading lower, off $1.86 to $134.88 a barrel around noon PDT.