The US dollar had its best performance in a month for many years. Since the greenback hit a recent trough on July 15, it has gained about 15% against the Australian dollar, some 10% versus the British pound, the Swiss franc and New Zealand dollar, 9% versus the euro, and over 5% versus the Japanese yen and Canadian dollar.

The main reason for the dollar's exceptional performance was a shift in interest rate expectations for the US and other industrialized economies, while a decline in crude oil prices also helped. The price of crude has fallen over 21% since it hit a historical peak of USD147.27 a barrel on July 11.

A slew of stronger-than-expected reports, including Q2 US GDP and home sales data, led to expectations that the US economic slowdown might be near a bottom and that a recovery might be under way. Therefore, there would be no need for the Fed to cut rates. Such expectations were reinforced by the minutes of the August 5 FOMC meeting. Committee members generally anticipated that the next policy move would likely be a tightening, though the timing and extent of such a move was uncertain.

In contrast, there are clear signs that the US economic weakness has spread to other countries, with more disappointing reports emerging out of the euro zone, the UK, Japan and Australia. Despite hawkish remarks by some ECB officials, many expect the ECB, as well as other central banks, to start cutting rates soon. Such expectations could continue to underpin the dollar rally in the weeks ahead.

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