On Wall Street, it's best not to think too hard or to look too closely into the mouths of gift horses. Since making predictions based on actual economic understanding is rare, analysts typically look to provide explanations after the fact. Within the financial services industry, currency traders are perhaps the greatest practitioners of this craft. While they often get the fundamentals completely wrong, it never seems to stop them from offering bizarre theories to explain currency movements.

After the Recession of 2001-2002, the dollar began an historic, nearly 40%, decline that bottomed out in early 2008. During that time, the falling dollar became a dominant topic in the financial world. While it was occurring, I argued that the sell-off was the result of the overly accommodating monetary policies of the Alan Greenspan-led Federal Reserve and the rapid increase of Federal debt under George W. Bush. Few currency traders agreed. Instead, most continually predicted that the slide would end long before it actually did. Their confidence may have been based on the fact that the Federal Reserve raised rates from 2003 to 2007. According to the textbooks, rising rates, which reward someone for holding a particular currency, are supposed to be a positive. Except, that time, they weren't. I argued that the rate increases were too mild to actually strengthen the dollar and too slow to deflate the growing bubbles in stocks and real estate. Eventually the dollar decline stopped, but it took the chaos of the 2008 financial crisis to bring it about.

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