Is The U.S. Dollar a Measure of Economic Sentiment?

One of the more interesting developments to come out of the recent financial crisis has been the connection between the dollar in forex trading and general global economic sentiment. Indeed, greenback in currency trading has turned into a sort of measure of how people feel about the global economy.

When the dollar is doing well in forex trading, it seems to be an indication that sentiment with regard to the global economy is negative. Buying up stable U.S. assets is an indicator that investors are concerned and interested in a "safer" investment that helps them create capital. When pessimism abounds, the greenback gains in currency trading.

On the other hand, things change when optimism prevails. The U.S. dollar begins to weaken in forex trading when investors feel good about the chances of economic recovery in the relatively near future. Investors feel a little bit better about coming economic growth and begin to take bigger risks on currencies and other investments that provide larger returns.

Going forward, it will be interesting to see how long this connection lasts.