As the global financial crisis became more obvious last fall, most major world currencies dropped in value against the US dollar. While it is quite clear why this happened to the Loonie (Canada is a major exporter of oil and other commodities which are falling like a rock), the question why this is happening with others have been puzzling me for a while. Normally, foreign currency exchange rates are determined by factors such as Purchasing Power Parity (PPP), current account position, interest rates and inflation differential and public debt.

None of these indicators, either separately or in combination, can explain the dramatic growth in the value of the greenback we have experienced over the last several months. Goods and services have not become cheaper in the US vs. Europe. US exports have not grown. Interest rates and inflation are coordinated by the central banks of the leading world countries like a symphony orchestra.

As for the US government debt, it is at its highest level in history, which would suggest that the US government is more likely to default on its obligations than ever. So why is their currency moving in the opposite direction? And not just moving, skyrocketing? I haven’t found a definitive answer, and if you know it you are more than welcome to share with us. One possible explanation is that investors who are selling their stocks in panic want to park whatever they have left in safe investment vehicles.

Traditionally, there is nothing safer for investments than US Government bonds, and you need US dollars to buy them. However, given the record high national debt and a series of outright stupid financial decisions the US government has made so far, this safety may no longer be absolute. It is scary to imagine what will happen when investors, including major world governments, finally realize this fact. Another possible explanation is that investors simply need huge amounts of US currency to close their short positions.

If that is a significant factor, the fall of the dollars will be magnificent once all those positions are closed. Whatever the reason may be this recent development in the foreign currencies market is suggesting that the traditional laws and principles no longer apply. To quote one expert, “the world economy as we know it has come to an end”.

Nikolay Sisan is a Certified Financial Planner and freelance writer in Vancouver.