The financial system has weathered its greatest challenge in decades. The bear market has been as intense a decline as any since the Great Depression. (Yeah, I know, that comparison is getting to be a cliche.) But what hasn't happened is a fall in the value of the dollar. In fact, just the reverse has occurred. After years of swooning, the dollar had a sharp rise as the financial crisis hit.
The reason for the strength of the dollar was the process of deleveraging created an intense and immediate surge in demand for dollars. I think the deleveraging process has passed its first phase. The Fed has created trillions of dollars of new money, much of which has been absorbed into the financial system, into an immense hole of losses. But it has prevented insolvent firms from failing, and of course, each new dollar dilutes the value of the rest.
I think the end of the stock market rally may be caused by a fall in the value of the dollar. As the rally continues, stocks will climb "the wall of worry" until they fall, which I see happening around the 10,000 mark. We'll have to watch closely as the rally continues. Bear market rallies seem to go on much longer than you would think.
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