Dollar rebounds. Thanks, Greece!

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NEW YORK (CNNMoney) -- Is the dollar about to move up in weight class?

Only two weeks ago, I wrote a column with the following headline: "The dollar: 98-pound weakling of currencies." At the time, the greenback was trading at about $1.46 versus the euro. By the middle of last week, the euro climbed as high as $1.49 -- only about 7% below its all-time high against the dollar.

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But in the past few days, the dollar has made a stunning comeback. It's looked more like Manny Pacquaio on Saturday night than "Sugar" Shane Mosely. To mix sports metaphors, it's come blazing out of nowhere much like Animal Kingdom did in the Kentucky Derby.

The euro is now trading at just under $1.43. That's a remarkable move down in a brief period of time. Why has this happened? And what's it mean?

Before you get too excited about some newfound dollar "strength," it looks as if the recent craziness in the currency markets has more to do with the bumbling and stumbling over in Europe as opposed to optimism about the United States.

The dollar rally began in earnest last Thursday after the European Central Bank decided to leave interest rates unchanged.

What's more, ECB president Jean-Claude Trichet sounded less worried about inflation than he did back in April -- when the ECB boosted interest rates for the first time in nearly three years. (That led me to joke over on Twitter that Trichet supports a strong dollar policy even if his central bank counterpart Ben Bernanke at the Fed does not.)

The dollar rebound picked up steam Friday after German magazine Der Spiegel published a story that suggested Greece was considering leaving the eurozone.

'Flash crash' worries go global

Although officials from Greece and the EU were quick to pooh-pooh the reports, traders clearly started salivating about the return of the drachma and a possible disbanding of the euro.

As if that wasn't enough, Standard & Poor's downgraded Greece's sovereign debt Monday morning. Greek bonds, already in junk status, were pushed further into "Sanford and Son" territory as S&P lowered its long-term rating on Greece to "B" and its short-term rating to a lowly "C."

Whew.

"It's amazing how fast things are changing in currencies," said Andrew Busch, global currency and public policy strategist with BMO Capital Markets in Chicago.

Busch said that just a few days ago, many thought the euro would soon crack $1.50. But now he thinks the euro probably has a better chance of slipping below $1.40 than climbing back toward $1.50.

Rob Stein, senior portfolio manager with Astor Asset Management in Chicago, agreed. He said the dollar could gain at least another 5% within the next six to nine months.

Stein said the recent pullback in commodity prices could lead to diminished inflation fears. Combine that with the reminder that the PIIGS sovereign debt crisis isn't over and that could mean no more tightening from the ECB for a while.

That's key since a main reason the dollar started to rapidly lose ground against the euro back in March was when the ECB hinted it would soon start to boost rates.

At that time, the assumption was the ECB would aggressively raise rates while the Fed did nothing. And traders usually flock to currencies of countries that have higher rates.

To be fair, the currency story isn't all about Greece and the rest of its porcine cousins in the eurozone. The better-than-expected jobs report Friday helped the dollar's cause too.

Investors had started to worry that the jobs numbers could be disappointing after a series of increases in weekly jobless claims. The fact that the U.S. economy grew at a tepid annualized rate of 1.8% in the first quarter added to jitters about the dollar.

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But some of the more bearish (i.e. double-dip recession) fears may turn out to be overdone.

"People miscalculated about the dollar," Stein said. "The U.S..economy, last quarter's GDP notwithstanding, is stronger than many think."

There's another simple explanation for the dollar's recent rise. Simply put, it had been down so long there was nowhere for it to go but up.

As I wrote in my column two weeks ago, many currency investors were following a strategy of shorting the dollar and going long just about everything else.

With so many investors piling into that trade, it stood to reason that just the slightest bit of good news about the U.S. or bad news about Europe was all that was needed to lead to an explosive move up. Lo and behold, we got both.

But let's be honest. Many of the worries currency traders have had during the past few months haven't gone away.

The U.S. still faces massive fiscal challenges, including an imminent showdown on the debt ceiling and longer-term budget deficit concerns.

Greg Michalowski, chief currency analyst with FXDD, a foreign exchange broker in New York, said the dollar may still have more room to run against the euro. But it may struggle against currencies from emerging markets.

China has been steadily raising interest rates for the past few months. India just boosted its key rate last week by a half-percentage point, a bigger move than expected.

Michalowski said that what's going on with the dollar is just a case of the market fixating on only one story. Right now, it's the PIIGS again. It wouldn't be shocking if the U.S. deficit becomes the main headline again later this year.

"Put this all in perspective. Traders just thought it was best to liquidate positions in the euro after the big run higher," Michalowski said. "But there are still enough reasons to justify a weaker dollar."

The opinions expressed in this commentary are solely those of Paul R. La Monica. Other than Time Warner, the parent of CNNMoney, and Abbott Laboratories, La Monica does not own positions in any individual stocks.