Recently, the US dollar has gained at lot of territory compared to the yen, pound, euro, ruble, and pretty much every other currency you can think of. The dollar is now at a 14-month high and has been on a real tear.
The reasons why are not that hard to understand, and it's important that we do.
Certainly, there's a lot of noise in the global foreign exchange (FX) data and we might dismiss the recent dollar move as meaningless, but because everything is now linked together, and because a rapidly rising dollar can mean that financial trouble is brewing, we need to pay attention here.
First, a bit of history.
Back in 2008, the dollar began to spike more than a month before stocks began to crater in earnest. Simialrly, the dollar began to spike before the stock weakness of 2011.
We can see that in this chart:
(Source)
Which leaves us wondering what the current spike might be trying to tell us. More on that in a moment.
The reasons why the dollar climbs during a crisis are easy enough to grasp. The lion's share of outstanding loans and bets are made in dollars, so as parties wish to wind down or close out those bets, they usually have to acquire dollars to do so. Sell currency X, buy the dollar, and pay off the note.
When a crisis strikes, traders tend to close out their trades — and they do so in a hurry. Nobody wants to be stuck in an exposed, leveraged position during the high volatility that comes along with a crisis. Even if your position turns out to be right at the end of it all, margin calls can wipe you out if/when that position goes against you, even if only for a brief period of time.
by rector 
