After reaching 1.5283 in early Wednesday trade the dollar rally ran out of gas for the rest of the week as uber hawkish Jean Claude Trichet dismissed any possibility of  near term rate cuts causing a quick short covering rally in the EURUSD.  For the week however, the US data produced mainly  positive surprises suggesting that the economy may be faring far better than most analysts forecast. The most impressive news on last week’s calendar was the sharp rebound in ISM Manufacturing report which  printed at 52.0 versus 49.1 expected. With services data which comprises the vast majority of US economic activity, squarely above the 50 boom/bust line, the arguments for an imminent US recession have become considerably less persuasive.

The high end of the yield curve has taken a significant hit over the past week; and carry trades have suffered the consequences. The DailyFX Carry Trade Index sunk $298 dollars since last Friday after failing to over take a descending trendline that has been directing the basket since risk appetite was tripped up by the subprime meltdown last summer. In turn, a breakdown in USDJPY and other yen crosses has weighed on risk reversals, which show a greater demand for puts. However, during this reversal, the outlook for a BoJ hike over the coming year has eased and volatility cooled, suggesting this will be a more orderly (and perhaps short-lived) carry unwind.

The Japanese Yen has had a very good week as investors continue to curb their risk appetite.

There has been a sharp divergence in the performance of the Australian, New Zealand and Canadian dollars this week.

The British pound extended its losses against the US Dollar, as investors remain confident the BoE should be cutting rates in the near future.

WisdomTree and Dreyfus Funds recently unveiled five new currency ETFs in order to fill a broad gap in the emerging markets category. Previously, investors were limited to such mainstay currencies as the US Dollar, Euro, Japanese Yen, British Pound, Australian Dollar, Canadian Dollar, and Swiss Franc. These new ETFs will expand this list to include the Indian Rupee, Brazilian Real, and the much-anticipated Chinese Yuan. It will also offer products for the Euro and Yen, but these probably won't draw much attention. The RMB ETF, especially, will be pounced on by investors, who have been clamoring for years for a cheap and easy way to capture the upside of the Yuan's inevitable appreciation.

The anecdotal evidence that China is diversifying its forex exposure
away from the Dollar continues to mount. To date, most of the focus has
centered around the Central Bank of China, which is passively
diversifying its reserves into European and higher-risk assets.
Apparently, Chinese exporters are also getting nervous about the impact
of a falling Dollar on their respective bottom lines. The RMB has risen
11% since the beginning of 2007, which means Chinese companies now
receive 11% less on sales to destinations abroad than they did for
equal-priced goods in 2007. As a result, some companies have taken to
quoting prices in Euros or to adjusting Dollar-denominated prices every
few months. Other companies are building assumptions of a more valuable

The Dollar is currently teetering on the edge of a precipice.  Many analysts are predicting that, having recently retreated from a record low against the Euro, the Dollar's best days are still in front of it. On the other hand, the economic data and interest rate pictures remain nuanced, and still favor the Euro on paper. In this article, we aim to sort through this morass, and produce a clear summation of the factors which bear on the Dollar in the short term.

In the year-to-date, the Korean Won has recorded the worst performance of any currency in Asia, having recently fallen to a 6-week low. The story is being driven as much by Dollar strength is by Won weakness. US equities have rallied over the last month, as investors may have been overly pessimistic in the previous months regarding near-term US economic prospects.  In addition, the Fed has probably lowered interest rates for the last time, whereas the Central Bank of Korea has held its benchmark lending rate at 5% since the summer. This yield differential, which currently favors Korea, may narrow substantially over the coming months, as the Bank of Korea is forced to reckon with slowing growth and rising inflation. Bloomberg News reports:

The Federal Reserve Bank recently lowered interest rates for the seventh, and perhaps final, time, bringing its benchmark federal funds rate to 2.0%. Since inflation is still hovering around the 4% mark, the Fed will probably be reluctant to lower rates further. Thus, the markets have been given all of the boost that they are likely to receive, and it is "fate" that will determine whether the economy will find its footing. (GDP growth clocked in at an anemic .6% for the last two quarters). The most recent data (including the just-released jobs data) indicate that the economy may be stabilizing, although consumption and the employment situation are still deteriorating.