Cautious, tentative optimism that the United States may be past the worst of the financial crisis seems to have found an echo in global currency markets.

There is talk that the dollar's long decline - a 26 per cent fall against a weighted basket of global currencies since January 2002 - might be over. Dollar bulls point to a turning point about a month ago. In mid-April the US currency hit a low point that it had not reached since 1995. Since then, in fits and starts, it has edged steadily upwards, lifted by a combination of better economic news, an improving financial climate and indications that the US Federal Reserve may, possibly, have finished cutting interest rates.

There has been anecdotal evidence from some of the world's biggest egos that currency markets might have turned. George Soros said recently that he was ending his long bearish stance on the dollar and had gone neutral. As far as I can tell, supermodels and sports stars have stopped demanding that they be paid in euros. So have we reached the trough of one of those long currency market cycles that crested in 2002?

As recoveries go, the dollar's has been pretty anaemic, so far. It is up about 3 per cent from its low point against the euro a month ago. It has risen a bit more than that from its low water mark against the pound, although that is mainly because sterling has been trying very hard to beat the US currency for the title of dog of the global foreign exchange markets.

Interestingly, yesterday's horrible producer price figures for the UK were one of those intriguing cases of bad news being good news for an asset class - in this case, the pound. Ordinarily, the discovery that input prices in your currency are increasing at an annual rate of 23 per cent would be a signal to sell it as fast as you possibly can.

But in the immediate term, currency markets are focused solely on short-term interest rate differentials and the thought that the Bank of England might have to pause before it cuts rates again means that the dollar-sterling interest rate gap is likely to stay wide.

The dollar has shown more sustained and stronger resilience against the yen - up by more than 7 per cent from the high point for the Japanese currency, which was reached a little earlier than that for the euro.

Dollar bears insist that it is still a little early to be confident that the currency's broad improvement is the start of a recovery. Against the global basket of currencies the dollar is only 2 per cent higher than it was a month ago. In the past six years of steady decline, there have been several periods when the US currency has risen by that amount in the course of a month or two, only to renew its decline.

And yet there is surely a case to be made that the US has finally found bottom. The epochal shift in exchange rates that began six years ago has distorted economic fundamentals to a quite remarkable degree. The dollar is now, by any measure, absurdly undervalued. In purchasing power parity terms, the US consumer is at something like a 40 per cent disadvantage to his and her counterparts in Europe, as will be evident from a distinct paucity of American tourists on the streets of Paris and Rome this summer.

Currencies can operate at variance from their real purchasing power for years, of course, but other macroeconomic conditions seem to point towards steady dollar appreciation from here on. The US trade deficit is plummeting, down from 8 per cent two years ago to about 5 per cent today.

As we have noted, the short-term factors driving the dollar lower in the past year may have dissipated. The financial crisis is probably past the worst. US interest rates may not have touched bottom, but they are surely close. Meanwhile, doubts about eurozone growth are starting to proliferate and, while the European Central Bank will surely maintain its reluctance to cut rates in the face of 3.5 per cent inflation, it is not likely to be raising them.

The dollar recovery could still be derailed by further signs of economic distress and a sure rebound is probably unlikely as long as political uncertainty persists in a pivotal election year. But, as Herb Stein, the great economist and writer, once noted, things that cannot go on for ever usually stop.

gerard.baker@thetimes.co.uk

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