People are flocking to dollars to cover their dollar denominated debts and they're also buying massive numbers of treasury bonds because that appears to be the only thing in the world that won't disappear overnight. Another reason for the dollar rally is the high LIBOR rate which is a measure of interbank lending risk. European banks need USD capital to pay for their bad US mortgage bonds. Usually they use the LIBOR for such things, and borrow from other banks, but since the LIBOR is so high and represents distrust between the banks (since they're over-leverged, opaque, and probably insolvent), they're using a the USD/EUR swap market for this capital and this drives the dollar up.
Things still look horrible for the dollar in the longer run and the rally isn't actually a sign of any sort of strength. We're using treasury bond debt to pay for all this bailout crap and other wastes of money. This is something we can't afford to be doing. If other countries manage to decouple from the dollar, they're just going to stop buying our debt and the US will be forced to default or hyperinflate.
We're just using one credit card to pay off another at this point. That never works for long, of course. Other countries don't need us, but they do need a while to realize we're a massive black hole for goods/credit and shift their production/exports accordingly. China is realizing this right now. Our citizens are so far in debt, they can't afford to buy any more junk from China and China is paying with their surpluses. They may prop the dollar up for a while, but sooner or later they'll realize it's futile.
This is also relevant: http://londonbanker.blogspot.com/2008/11/dollar-strength-sustainability.html
Post edited at 1:17 am on Nov. 22, 2008 by shadowpool
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its because the other currencies (euro notably) aren't doing so well either 
