Earlier this week, the dollar traded at an 11-month high against the euro. Why?

For one, commodities are under extreme pressure. You’ve probably noticed by now that there’s a strong correlation between oil and currency strength—as crude oil prices pull back, the euro weakens; and as the euro weakens, the dollar gains strength (see also, "Profit From the Dollar's Free Fall").

The dollar has remained surprisingly resilient in the face of a slowing global economy, further big-bank write-downs and the slumping of pretty much every sector from commodities to retailers.

So—could the dollar actually recover?

The answer will have a vital bearing on whether investors allocate more (or less) of their money to investments at home or overseas. Global investing has become all the rage in recent years.

If, however, the dollar begins to appreciate in a meaningful way, currency losses will put a damper on many foreign investments.

We aren’t simply talking theory here. From 1995 to 2000, during the dollar’s last sustained uptrend, U.S. stocks outperformed the rest of the world (in dollar terms) by a wide margin. The same was true from 1990 to 1992. So what's behind the dollar's slide? Let's find out.

Factor #1

The bursting of the Internet bubble and then the 9/11 attacks drove the U.S. economy into a recession.

To offset a slumping economy, the Federal Reserve slashed domestic interest rates well below those of our trading partners in Europe, Canada and Australia. Global investors dumped dollars in favor of higher-yielding currencies like the euro (see also, "How to Invest in Emerging Market Stocks").

Factor #2

The Fed’s ultra-low rate policy in the early part of the decade also stimulated the now-bemoaned housing boom.

By allowing homeowners to extract equity at rock-bottom interest rates, the central bank triggered a consumption binge. Many of the goods consumers purchased were imported, driving the trade deficit up, and the dollar down. (see also, "Fannie-Freddie Bailout: What It Means to You").

Factor #3

Finally, the government’s trillion-dollar tab for the Iraq and Afghanistan wars has forced the Treasury to issue large amounts of debt.

Since the end of 2002, the national debt has...