Most of the stories and analysis featured on the Forex Blog concern the Dollar, or at the very least, how other currencies are performing relative to the Dollar. But there are many important currency pairs that don't involve the Greenback, including the Euro/Yen. Last week, the Euro climbed to its highest level in 2008 against the Yen, thanks to diverging economies and interest rates. Neither economy is particularly strong, but the Bank of Japan is using especially bearish language to describe its faltering economy. It should be noted that despite a prolonged period of economic growth, the Bank of Japan avoided raising interest rates even once. Meanwhile, the European Central Bank is becoming increasingly hawkish in its monetary policy rhetoric. The result has been a sustained (and soon-to-widen) interest rate differential, which has contributed to a dynamic that is unique to these two currencies. Bloomberg News reports:

The yen fell against every major counterpart today after a government report showed Japan's longest postwar expansion may be over.

Read More: Euro Climbs to Year's Highest Against Yen on Rate Speculation

Apparently, Russia has aspirations to turn its currency, the Rouble, into an international reserve currency. Moreover, according to an official with the International Monetary Fund (IMF), this plan is not that far-fetched. Despite soaring inflation and political oppression, Russia's economy is forecast to grow at 8% for the next two years, due primarily to soaring natural resource prices. By its own admission, Russia needs to diversify its economy without inhibiting growth, strengthen its financial system, and conduct monetary policy with price stability in mind. These ambitious steps, combined with continued economic growth, would position the Rouble to be a stable and viable alternative to the Dollar, especially on a regional basis. The Guardian reports:

Russia, with a $1.3 trillion economy at the end of last year, is targeting a place among the world's top five economies by 2020, [President] Medvedev has said. But he acknowledges the rule of law needs to be strengthened and corruption must be rooted out.

Read More: IMF says rouble could become reserve currency

Ri

George Soros, one of the most well-respected investors who sits in the same echelon as Warren Buffet, just released his book on the current state of the world's financial markets. His conclusion is that a "super-bubble" is forming. Connecting to all of the major financial markets, namely property, commodities, and equities, Soros outlines how the expansion in credit that has unfolded over the last 30 years has caused an unsustainable run-up in the prices of most investable assets. Due to the resulting inflation, investors are now fleeing en masse from mainstream securities and parking their money in commodities, triggering a super-bubble therein. With regard to the Dollar, Soros expects the currency to fall as the credit crisis runs its course and Central Banks gradually replace it with more stable currencies. CBC reports:

I think that the dollar is probably still, will emerge as the most widely used currency but the United State will have to abide by the limitations that are imposed on it by the willingness of the rest of the world to hold dollar reserves.

Read More: Bubbles building in financial markets

The Central Bank of Vietnam has effectively devalued its national currency, the Dong, to bring it in line with market fundamentals. Pressure had been building under the Dong due to soaring inflation, currently estimated at 25%. While 2% devaluation was small in itself, it caps a 5% drop in the currency since March 25. In addition, the move showed just  how seriousness Vietnam is about restoring macroeconomic stability. Unfortunately, Vietnam's balance of trade is probably deteriorating faster than it can be repaired, which means the Dong may slide much further. The black market exchange rate is estimated at 18,000:1, compared to the official rate of 16,461:1. Non-deliverable forward contracts imply a 30% depreciation in the Dong in the next year. The Guardian reports:

Fitch Ratings, which lowered its ratings outlook on Vietnam to negative from stable in May, said policy responses have been too slow and too small to deal with the economic pressures.

Read More: Vietnam effectively devalues dong 2 pct

When it comes to forex, the old adage actions speak louder than words doesn't always hold. In fact, words can be quite effective on their own in holding down or propping up a currency. For a while, the threat of intervention by the Central Bank of Japan was enough to hold down the Yen, despite a lack of supporting action. With regard to the Dollar, several high-ranking economic officials have recently made unsolicited comments implying that traders should think twice about shorting the Dollar. First, Ben Bernanke worried publicly about the effect of the sinking Dollar on inflation. Then, President Bush suggested that the Dollar was undervalued relative to economic fundamentals. Treasury Secretary Hank Paulson capped the effort by refusing to dismiss the possibility of coordinated intervention on behalf of the Dollar. While it has been eight years since the US last intervened in forex markets, it looks like investors are taking these threats seriously. The Wall Street Journal reports:

Traders seized on the comments as a signal that the administration -- which has never intervened in the markets before -- could do so if a dollar rout gets bad enough.

Read More: Intervention, Other Tools On Table for Dollar

Kurt Brouwer offers his take on the falling USD over at Fundmastery Blog:

Let’s start with how far the dollar has fallen. One problem with our media is that the news of the day is often one-sided and it seldom comes with any historical perspective. For example, do you remember hearing that the Euro fell to historic lows versus the dollar? Well, as you will see from the chart below, it happened not too long ago. In fact, the Euro fell steadily versus the dollar for the first five years of its existence, beginning in January 1999. It did not get back to even until mid-November, 2003. At the low point for the Euro you could have bought one for 84 cents. Now, it takes a $1.56.

Read more: How Far Has the Dollar Fallen? And Why? — What’s Next?

The Continuous Linked Settlement (CLS) Bank, which performs the thankless job of settling the nearly $4 Trillion in currency trades completed each day, recently announced that it will now settle trades involving the Israeli Shekel. This is quite an honor for Israel, as only 16 other currencies can claim this distinction. Implicitly, the Israeli Shekel has been deemed both important and stable enough to be fully convertible. The announcement marks another positive development for the currency, which has appreciated by an astounding 30% against the Dollar over the last year, including 15% since the beginning of 2008. It is unclear when amateur traders will be able to trade the Shekel, but now that it is included in the CLS roster, it probably won't be long. YNet reports:

The Bank of Israel has been in contact with CLS on the matter since 2004 and had consistently pushed Israeli banks to meet the CLS criteria. The induction of the shekel into the CLS system is considered a very important step towards upgrading Israel's financial infrastructure.

Read More:

CLS declares Israeli shekel eligible for international transaction

In the near future, this day may be looked back on as important in the battle between the Dollar and Euro that is currently being waged. The previous month had been relatively kind to the Dollar, which had gradually clawed its way back from a record low against the Euro. Then came yesterday, when Jean-Claude Trichet, leader of the European Central Bank, surprised investors when he announced that not only will the ECB not be cutting rates, but in fact, it may hike them. If enough members of the Central Bank become convinced that inflation is unlikely to abate, the rate hike could come as soon as next month. Today, the knockout punch was delivered, when the US unemployment rate came in at 5.5%. Not insignificant by itself, what was most shocking was that the crucial indicator had risen .5% from last month, its largest increase in more than a decade. Reuters reports:

That should undermine the dollar's prospects..."The focus is on the unemployment rate, as it's obviously starting to catch up with the softening in the payrolls figures...and that's what the market is reacting to."

Read More: Dollar falls as US jobless rate shoots up

CB,

When China's foreign exchange reserves breached the $1 Trillion mark in November 2006, it was a momentous occasion. Over the following 18 months, however, analysts yawned as the reserves nearly doubled in size. In the month of April, alone, China added an astounding $75 Billion to its stockpile, bringing the total to $1.76 Billion. Analysts attribute this sudden increase to a massive inflow of hot money, as investors seek to profit from both the Yuan's inevitable appreciation and the widening interest rate spread between China and the US. The Central Bank of China also recently announced the official 2007 trade numbers, which reveal a 49% increase in the country's current account surplus, to $370 Billion. By no coincidence, this news caused the highest daily appreciation in the Chinese Yuan in more than three months. Bloomberg News reports:

China has allowed a 2.6 percent gain over the past three months, making it Asia's best performer among the 10 most-active currencies in the region outside Japan.

Read More: Yuan Gains Most in 3 Months on Efforts to Curb Trade Surplus and China's forex reserves hit 1.76 trillion dollars: report

After sinking to a record low of $1.60 against the Euro in April, the Dollar has rallied to a 3-month high. According to analysts, the interest rate story appears to have driven the sudden reversal. In short, expectations surrounding the EU-US interest rate differential are changing, such that investors now believe the ECB will begin lowering rates just as the Fed begins hiking them. This story is also consistent with the broader economic picture, whereby the Fed is shifting its attention from the economy to inflation, while the ECB is doing the opposite. Meanwhile, the Treasury yield curve has gradually expanded in order to reflect expectations for higher medium-term interest rates. It doesn't look like the Dollar will be a funding currency for carry trades for much longer. Thomson Financial reports:

John Noonan, a senior foreign exchange analyst at Thomson IFR, said the hawkish turn in Fed expectations is coinciding with a growing view that the euro zone economy will suffer more from the U.S. economic fallout than previously thought.

Read More: Dollar near 3-month highs vs euro on U.S. GDP revision