You're now free to invest in Iceland ... should you be so inclined. On Sunday, the country will begin lifting its post-financial disaster capital controls, giving investors a bit more elbow room. Foreign currency investments coming in won't be subject to the existing controls.

According to a statement released by Iceland's central bank, "Investors are authorized, without restrictions, to convert into foreign currency the sales proceeds from assets in which they invest after Nov.1." The statement also said, "Previously, non-residents were fully authorized to transfer foreign currency deriving from interest and dividends on investments in Iceland."

Investors have flocked to foreign exchange trading over the past 10 years, and the venture capital community is ready to grab a piece of the action.

Two companies -- Currensee Inc. and Tradonomi LLC -- are angling for central spots in this emerging trading community, and several funds are placing pretty big bets on their success. Currensee has a social network for forex traders, while Tradonomi's move was to create a game-like user interface to make it easier for would-be fortune-makers and thrill-seekers to trade foreign currencies.

The U.S. Federal Reserve continues to expand its balance sheet. Further, the U.S. government is piling on debt and public borrowing at almost a faster rate than Mexico and Argentina did during "the bad old days" decades ago.

And yet the dollar continues to hold its own against most of the world's other major currencies. The dollar strengthened about 2 cents against the euro and British pound Tuesday at mid-day, to $1.3190 and $1.4538, respectively. Just as significant, the dollar has strengthened about 11% versus the euro and about 22% versus the pound since October 2008.

Big factor: first in, first out

What's going on here? BloggingStocks asked economist Peter Dawson to provide some clarity.

"Three factors are at work. Most important is the economic cycle. The U.S. was the first to enter a recession and it will likely come out of it sooner than Europe and the U.K., so that's supporting the dollar," Dawson said. "Second, there's still considerable flight-to-safety by stock-shy investors, which almost always increases purchases of U.S. Treasuries, another dollar plus."

Here's an icebreaker for your next cocktail party or dinner party. (This one is sure to impress your friends and colleagues even more than explaining the market and economic significance of credit default swaps.)

Q: What's the strongest currency in the world?

Well, let's evaluate the world's major currencies and hone in on the answer.

• The dollar -- For the last few decades, the dollar was the world's strongest currency. After all, it is the world's reserve currency. However, recent history has not been too kind to the dollar -- the dollar's value has declined throughout the decade -- and the near-term outlook does not look good, either. Massive government spending to both end the financial crisis and put the U.S. economy on a sustainable growth track means additional inflation, if not dollar devaluation, is likely. Nix the dollar as the world's strongest currency.
  

• The British pound -- At one point in history, the sun never set on the British Empire, and the pound was the world's reserve currency. Although the pound has been strong this decade, likely additional interest rate cuts and fiscal stimulus to jump start the economy of Her Majesty's Kingdom, as John Lennon would refer to his native land, means the pound is likely to lose value in the year ahead. Nix the pound as the world's strongest currency.
  

• The euro -- The euro has challenged the dollar for reserve currency status this decade, and has gained versus the buck for most of that time, but you guessed it: the heavy hand of the financial crisis is beginning to take a toll. For example, Germany alone has approved a 650 billion euro (or $500 billion) bank rescue plan. That's equivalent to the U.S. putting in place a $2.5 trillion plan. Wow. Let's hope Germany doesn't have to use most of it. Of course, the euro zone is more than Germany, but severe stagnation in Germany suggests several more interest rate cuts by the European Central Bank. Nix the euro as the world's strongest currency.

With passage of the rescue bill, and the U.S. Treasury's upcoming actions to stabilize credit markets through a variety of tools/mechanisms, one area that is likely to experience negative consequences is the dollar.

Simply, more dollars borrowed (or more dollars printed) almost always means each dollar is worth less. Economist Richard Felson said a gradual, orderly decline in the dollar "would be expected, and is almost considered the default response, given increased U.S. government borrowing." The dollar closed Friday down about one-half cent to $1.3775 and $1.7713 versus the euro and the British pound, respectively.

Central banks monitoring dollar's level

However, leaders of the world's major industrialized economies will not, in Felson's interpretation, accept a sudden and/or inordinate decline in the dollar. "Along with increased stress on the financial system, 'brutal' currency movements, as [European Central Bank President Jean-Claude] Trichet has said, throws everything out of whack by making it hard for companies to project costs of foreign operations," Felson said. "For these reason and others I believe the major central banks will intervene to support the dollar, should the U.S. Treasury's extra borrowing or the U.S. Federal Reserve's extra lending for the bailout lead to too large or too quick of a decline in the dollar."

The initial analysis regarding the dollar's latest move suggests this dollar rally has legs, but don't write or e-mail home just yet. "We have to take things one day at a time with this dollar move," currency trader Andrew Resnick told BloggingStocks Thursday.

Discretion -- yes, the better part of valor -- is advised because the dollar's rally "is not being driven by robust U.S. economic data or by a conviction that all is well financially in the United States, but by sentiment that Europe's economy is trending toward a recession," Resnick said.

That sentiment propelled the dollar to a 1-year high versus the euro Thursday, good for a 1 cent improvement to $1.3911. The dollar also strengthened about a quarter-cent to $1.7515 versus the British pound.

Resnick added that the market "is basically factoring-in an interest rate cut by the ECB at its next meeting in October." The European Central Bank kept its key, short-term rate, the refinance rate, the same at 4.25% at its September meeting.

The comeback of the beleaguered dollar continues.

The dollar strengthened to a six-month high versus the euro Tuesday, and also rose against the world's other major currencies on a growing consensus in foreign exchange circles that global economic fundamentals are shifting in favor of the greenback.

The dollar strengthened about 1.5 cents to $1.4465 versus the euro, and about 1.4 cents to $1.7877 versus the British pound Tuesday at mid-day. The buck also gained one-half yen to 108.62 versus Japan's yen.

Pivotal for dollar: Europe, Asia GDP

Further, although Tuesday's dollar catalyst was the realization that Hurricane Gustav would cause considerably less-than-forecast damage to Southeast U.S. oil production and the refinery infrastructure, trader Andrew Resnick told BloggingStocks the longer-term focus remains regional GDP growth.

"With Hurricane Gustav out of the way, sentiment's building that this dollar rally has legs. European growth has slowed to recession levels, and China's economy has slowed as well. For Europe, lower interest rates are likely to follow, and that's dollar bullish," Resnick said. Resnick added that he expects the Bank of England to cut its benchmark interest rate by a quarter-point to 4.75% when it meets September 4. He doesn't expect the European Central Bank to lower its 4.25% refinance rate on September 4, but that stand-pat policy may change to accommodation, later this fall.

Japan's yen resumed its rise against higher-interest currencies Thursday, suggesting that the prospect of additional credit market losses continues to lower investors' confidence in global growth and performing assets.

The yen rose as institutional investors continued to decrease their use of the carry trade.

In a carry trade, investors, especially institutional investors, borrow funds in a country with a low interest rate (or borrowing cost) and buy assets in a country where returns are higher. The investment can take many forms, including stocks, bonds, funds, or even the higher-interest currency itself.

The yen strengthened about 1.6 yen to 160.71 versus euro, about 3 yen to 201.95 versus the British pound, and about 1 yen to 108.20 versus the dollar.

Another big mortgage write-off ahead?

Currency trader Andrew Resnick told BloggingStocks Thursday sentiment is building in the foreign exchange and other markets that there will be "another, major housing-related write-off by a bank or series of banks in the U.S. or U.K, or possibly Fannie Mae (NYSE: FNM) or Freddie Mac (NYSE: FRE) problems."

Some market signals are well-known and easily understood. Others are arcane and more-complex, but just as telling.

There's mounting evidence that the "carry trade" is ending, or that at least institutional investors are decreasing their use of it as an investment tactic.

In a carry trade, investors, especially institutional investors, borrow funds in a country with a low interest rate (or borrowing cost) and buy assets in a country where returns are higher. The investment can take many forms, including stocks, bonds, funds, or even the higher-interest currency itself.

Carry trade: A growth confidence indicator

Now, investors/readers may legitimately ask, Why is it important to know what's happening to the carry trade?

Economist Peter Dawson told BloggingStocks that it's important to monitor carry trade flows and data because it's one indicator of investor confidence in a market's ability to produce a return on equity, and by extension, in its economy to grow.

In other words, the carry trade abounds when investors are confident; it wanes when they're not, he said.

The much-maligned, beleaguered dollar -- driven lower for nearly a decade by series of unconscionable mistakes by United States' policy makers, may be poised to make a comeback.

But don't try to put those words into the mouth of currency trader Andrew Resnick. No sir. Dollar what? Resnick remains the skeptic of skeptics. There have been too many false break-outs and weak rallies that proved to be mere corrections in the euro's decade-long rise, in Resnick's view, to conclude at this juncture that the worst for the dollar -- and, by extension, for the United States -- is over.

A strong week for the greenback

That said, the week's data points are compelling. The dollar registered its biggest gain in two months against the euro, strengthening to $1.5006 -- or an improvement of almost 3.7% -- an enormous move in the currency market for one week. The dollar also strengthened about 2.1% versus the British pound to $1.9208, and about 2% versus Japan's yen to 110.08 yen.

What has caused the sudden turn of events in the currency market? (We don't want to use more-positive adjectives just yet.) Not the health of the U.S. economy, according to Resnick.

Traders on the long side of dollar trades cheered the U.S. Treasury's plan to shore-up Fannie Mae and Freddie Mac, as the dollar rose against the world's other major currencies.

The dollar strengthened about one-half cent to $1.5874 versus the euro and two-tenths of a yen to 106.46 versus Japan's yen in Monday morning trading. The dollar was virtually unchanged against the British pound at $1.9877.

On Sunday night, U.S. Treasury Secretary announced a sweeping rescue package and asked Congress for the authority to buy unlimited stakes in and lend to Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE), aiming to head-off a collapse in confidence, Bloomberg News reported Monday. Separately, the U.S. Federal Reserve approved Fannie's and Freddie's ability to borrow directly from the central bank.

'Wait and see approach'

Currency Trader Andrew Resnick told BloggingStocks Monday even though the currency and stock markets have initially reacted favorably to the Treasury's / Fed's measures, many currency traders are taking a "wait and see approach" until they know what financial form the assistance to Fannie and Freddie is likely to take.

The dollar rose more than 1.4 cents against the world's other, major currencies Thursday -- its third large gain in four days -- after traders calculated that better-than-expected May retail sales will prompt the U.S. Federal Reserve to increase interest rates soon, possibly by late summer.

The dollar strengthened 1.4 cents to $1.5400 versus the euro, 1.7 cents to $1.9444 versus the British pound and about 1 yen to 107.92 versus Japan's yen on Thursday at mid-day.

Dollar bulls, subject to numerous false-breakouts during 2008, were encouraged by the most recent U.S. retail sales data. The U.S. Commerce Department Thursday announced that May retail sales rose 1%, double the consensus estimate of economists surveyed by Bloomberg News.

May retail sales surprises traders

Currency trader Andrew Resnick told BloggingStocks Thursday the surprisingly upbeat May retail sales report has not made him a dollar bull, but he's inching closer to it. "It's tough to form a meaningful conclusion with just one data point, but retail sales did take the dollar bears by surprise," Resnick said. "Most were expecting a sort of neutral number, but the May number was not neutral. If anything, it suggests the consumer, while cutting back, has not disappeared from the stage completely."

Still, the favorable May retail sales report was not enough to push Resnick decisively into the dollar bull camp, Fed rate increase this summer or not, and he remains flat, with no open currency positions presently. "We've been led down this dollar recovery road too many times, so for the sake of avoiding a red screen [trading losses], I'm flat," Resnick said. "What's that old saying? 'fool me once, shame on you, fool me twice, shame on me.' "

The dollar rallied to a six-week high Wednesday after U.S. productivity increased at a larger-than-expected rate and sentiment surfaced that Europe's economy may have slowed considerably.

The dollar rose about 2 cents versus the euro -- a large move in the currency market -- to $1.5370 on Wednesday afternoon. The dollar also gained against the world's other major currencies, rising about 2 cents to $1.9530 versus the British pound? about 0.5 cents to $1.0555 versus the Swiss franc and about one-half yen to 104.85 yen versus Japan's yen.

U.S. productivity gives dollar a lift

Earlier in the day, the U.S. Labor Department announced that U.S. worker productivity increased at a 2.2% annual pace in Q1 2008, well above the 1.7% Bloomberg News survey consensus estimate.

Independent currency trader Andrew Resnick told BloggingStocks Wednesday the Q1 2008 productivity data, combined with a sense that the European Central Bank is behind-the-curve concerning interest rate cuts to deal with slowing economic growth, put traders in dollar-buy mode.

The dollar rallied to a 5-week high Thursday on the belief the U.S. Federal Reserve will at least pause in its interest rate cutting cycle, as it evaluates the impact of both monetary and fiscal policy stimulus on the sluggish U.S. economy.

The dollar rose more than 2 cents versus the euro -- a large move in the currency market -- to $1.5440 on Thursday at mid-day. The dollar also gained against the world's other major currencies, rising about 2 cents to $1.9730 versus the British pound, about 1.7 cents to $1.0510 versus the Swiss franc, and about 1 yen to 104.50 yen versus Japan's yen.

Dollar rally 'may have legs'

Further, unlike previous fits-and-starts regarding earlier dollar moves higher, independent currency trader Andrew Resnick told BloggingStocks Thursday this dollar rally "may have legs" due to a potential change in fundamentals, in the dollar's favor.

A European Central Bank interest rate cut may be up ahead.

At least that was the verdict expressed by currency traders Thursday, who drove the dollar to its largest gain in almost four years after a report indicated that German business confidence dropped in April 2008.

The dollar rallied 2 cents - - an enormous move in the currency market - - to $1.5665 versus the euro Thursday. The dollar also rallied about 1 cent versus the British pound to $1.9705 and about 1 yen to 104.37 yen versus Japan's yen.