Why the dollar's bounce doesn't mean it's back

By Jia Lynn Yang, Fortune reporter

(FORTUNE Magazine) -- The greenback has been sliding against foreign currencies for most of the past five years, but it started strong in 2007. That may not last.

1 How much has the dollar really rallied? Not that much. In the first two weeks of January, the value of the dollar increased 2% vs. the euro. And it's near a four-year high against the faltering yen. But since hitting a peak in 2002, the greenback has fallen 29% against a basket of six major currencies and 50% against the euro alone.

2 What's driving it up now? Two words: interest rates. Recent U.S. economic reports show surprisingly robust consumer spending and accelerating industrial activity. That means Fed chairman Ben Bernanke is likely to hold the benchmark rate at 5.25% to keep inflation in check. Investors who've been anticipating a cut (and looking for currencies where the interest rate, and thus their returns, might rise) are moving back into dollars.

3 What could send it back down? The same thing that's been weighing on it for years: the rising U.S. current account deficit (the trade deficit plus interest payments), which hit $900 billion, some 7% of GDP, in 2006. Historically, ratios above 5% of GDP have caused currencies to lose value.

4 How can I hedge? Make sure a portion of your portfolio is in international stocks or bonds, preferably of companies that aren't reliant on the U.S. economy. For a purer play against the dollar, you can open a savings account or buy a CD in a foreign currency.

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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer LIBOR Warning: Neither BBA Enterprises Limited, nor the BBA LIBOR Contributor Banks, nor Reuters, can be held liable for any irregularity or inaccuracy of BBA LIBOR. Disclaimer. Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.