USD is kicking butt - why?

The USD index has rallied over 5%, and many short players were clobbered. But what has changed in the U.S. economy to justify this sudden shift? Major banks are still insolvent, we still borrow $2B a day from Asia to fund our deficit spending, and price inflation for consumers is ticking along at 8%-10%. Happy days are here again?

My theory for the odd rally is recent military movements. Two Navy carrier groups are headed to the Persian Gulf to join the two already stationed there (no mention BTW in the mainstream press), and the Soviets -- I mean Russians, are starting to reclaim territory in Georgia (something to do with an oil pipeline). If the SHTF, investors want to be in U.S. dollars.

I would not attach too much currency significance to particular military movements, as these have not had so much impact up to this point. There are much more direct economic & financial reasons.

A good part of it has been due to other currencies 'catching up' to the dollar's fall as the market is increasingly discovering that the rest of the world's economy is not entirely insulated from U.S. financial troubles. So the fall of other currencies is manifest by a rise in the dollar. The other side of that coin is the commodity rally breaking as the market realizes the danger that a worldwide recession poses to near-term commodity demand. So as commodities fall, the relative value of currency compared against it goes up.

Some of it could also well be technical, as massive shorting of the dollar forces a lot of buying to cover if any rally occurs, and there may have been massive shorting when the Fannie Mae/Freddie Mac crisis came to light.