Dollar rally vs euro continues on worsening European economy

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The United States is set to sign into law one of the largest stimulus packages since FDR's New Deal -- one with record borrowing attached to it -- but you'd never know it from the dollar's trend.

The dollar continued to rally Tuesday against the euro and the British pound on renewed concern that European economic conditions will worsen.

The dollar strengthened about 1.5 cents to $1.2635 versus the euro and about one-half cent to $1.4222 versus the British pound. The dollar also rose about 1.2 cents versus the Swiss franc.

President Obama is expected to sign the $786 billion fiscal stimulus package Tuesday, the U.S. Treasury's plan to deal with toxic assets is yet to be fleshed-out, and the U.S. national debt will exceed $11 trillion shortly -- three historically dollar-bearish factors -- but traders were unmoved. Traders bought the dollar partly in a flight to safety or risk aversion move and partly on a belief that investment conditions will improve in the U.S. before they do in Europe, Bloomberg News reported Tuesday.

Concern about Eastern Europe

Economist Richard Felson said Tuesday banks in Germany, France, Austria and Italy would be hurt by an economic slowdown in Eastern Europe. "These banks have lent to companies in Eastern Europe, investments that were sound as Eastern Europe's economy grew at robust rates during the boom," Felson said. "But now recessions in these nations will threaten debt service capabilities, hurting Western Europe's banks, which will weigh on the euro and pound. It's yet another dimension of the U.S. and global economic slowdowns."

Dollar Analysis: For U.S. investors, the rising dollar does make U.S. investments more attractive versus Europe. The problem is, however, if Europe's economy worsens, that will weigh on the European operations of U.S. corporations -- which would constitute another negative data point for U.S. stocks.
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