The dollar's 12-year highs at the expense of the euro could be shortlived

The economic dynamics that are driving a growing gap between the two currencies are unpredictable and chasing higher US yields could be a mistake

The US dollar is hitting new 12-year highs almost daily, while the euro seems to be plunging inexorably to below dollar parity. Currency movements are often described as the most unpredictable of all financial variables; but recent events in foreign-exchange markets seem, for once, to have a fairly obvious explanation - one that almost all economists and policymakers accept and endorse.

French President Franiois Hollande, for one, has ecstatically welcomed the plunging euro: "It makes things nice and clear: one euro equals a dollar," he told an audience of industrialists. But it is when things seem "nice and clear" that investors should question conventional wisdom. A strong dollar and a weak euro is certainly the most popular bet of 2015. So is there a chance that the exchange-rate trend may already be overshooting?

If the dollar continues to rise, US economic activity and inflation will weaken