That Wall Street is schizophrenic about the level and direction of the dollar should come as no surprise. Financial markets have an innate need to explain every two-tick move, and as the dollar often is doing something, it is easy to ascribe certain market behavior to its movements. How else can we reconcile the perpetual fear of a declining dollar with comments that this very same weaker dollar, once it arrives, is good for the stock market?

Those who subscribe to the last idea argue that a weaker dollar means the repatriated earnings of U.S. firms claim more dollars upon conversion and therefore increase nominal earnings. In addition, the weaker dollar is alleged to make U.S. exports more competitive in the world market. The articles "Currencies and Federal Reserve trade weights" and "Minor currencies and Federal Reserve trade weights" (Currency Trader, July and August 2007, respectively) address the lack of proof for this argument, presenting 35 years of countervailing evidence in rebuttal.

The first argument, that investors would welcome higher nominal earnings in a debased currency, does not make much sense, either. It is nothing less than a refutation of efficient markets and suggests investors are fools at the margin. It also suggests countries can devalue their way to prosperity, which is an interesting concept, to say the least.