Almost all of the speculation surrounding the Chinese Yuan is aimed at predicting the point at which the currency will stop rising. Will it stop at 6.5? 6? 5? 1? But what if the currency has already peaked, at least temporarily? The Central Bank of China is now openly airing its concerns about a slowing economy, which it believes is more problematic than the country's surging inflation rate. Accordingly, it will probably relax interest rates and slow the appreciation of the currency, in order to give businesses and exporters the leverage they need to keep the economy going. In fact, the Central Bank already announced a $50 Billion plan to prop up ailing capital and property markets. Such measures are likely to further stoke the fires of inflation, at a time when prices are already rising at the fastest pace in a decade. The futures markets have been quick to take note, and expectations for Yuan appreciation are falling accordingly. Bloomberg News reports:

[Futures contracts] suggest the yuan will reach 6.6060 per dollar in the next 12 months, an advance of 3.8 percent from the current exchange rate. Two weeks ago the contracts, predicted an advance of 5.3 percent. At the start of last month, they priced in a 6 percent rise.

Read More: Dollar Bottom Against Yuan Gets Louder in China Bet

The USD is officially trending upwards, having appreciated over 7% against the Euro in only a few weeks. Of course, hindsight is 20/20, and some analysts now claim that support for the Dollar had been building for several months. They point out that the first break for the Greenback came in March when the Fed stopped lowering interest rates. Then, at a meeting of the G8 nations, several high-ranking officials indicated that they were unhappy with the recent decline of the Dollar and suggested that coordinated intervention should be effected in order to prevent a further collapse of confidence. While this "verbal intervention" was ultimately not backed by any kind of substantive action, investors apparently took the hint.

Further comments by America's Federal Reserve Bank and the Secretary of the Treasury made clear that the US remained committed to the Strong Dollar Policy. A reprieve in the rise of commodity prices, followed by the proposed bailout of the two cornerstones of American's sprawling mortgage industry, convinced currency traders that the world's economic policymakers simply would now allow the Dollar to fall further. Lo and behold, the Dollar failed to break through a resistance level at $1.60/Euro (near a record low), and has since rallied sharply. The International Business Times reports:

It seems that that the big money had committed to a long Dollar, and was waiting for the economic slowdown to spread to the Euro Zone. Once the Euro Zone began to experience a slowdown, it just became a matter of time before the short positions that had been built for several months would pay off.

Read More: U.S. Dollar Takes Control of Forex Markets

While not yet in the same league as other popular emerging market currencies, the Brazilian Real and Mexican Peso are sure to join their ranks soon; both currencies have risen markedly over the last few years, and have performed especially well in the year-to-date. They have been propelled by interest rates that are generously high, especially compared to those of the US and EU. Brazil's benchmark rate currently stands at 13%, while Mexico's equivelent rate is slightly lower, at 8%. In fact, interest rates are quite high throughout the region, including in Peru and in Chile. Anlaysts expect most of these Central Banks will further tighten their leding rates because of surging inflation, which would provide further impetus to the upward marches of their respective currencies against the Dollar. Reuters reports:

"We see EMEA (European, Middle Eastern and African) central banks as reaching the end of their (monetary) tightening cycles, whereas there is still more to go from Latin America," wrote Barclays Capital.

Read More: Latam inflation eyed for currency impact

In historical periods of financial crisis, where did investors turn? The answer: the US. Some analysts thought that this logic would be turned on its head during the current credit crisis, since the reputation of the US as investing safe haven would surely be undermined by its role in the global economic slowdown. Over the last couple weeks, however, investors have returned en masse to US capital markets, sending US equities as well as the US Dollar to new highs. This has created a self-fulfilling cycle whereby a more valuable Dollar is driving commodity prices lower, which in turn, will benefit the US economy and drive the Dollar even higher. Perhaps the new logic is not so different from the old: that although it was the US that is primarily responsible for the credit crunch, it is also the US which is most likely to lead the global economy out of it. The Los Angeles Times reports:

Whether we come out of this first remains to be seen. But some grim economic data from Europe and Japan in recent weeks at least confirm that the slowdown has gone global. In that sense, the U.S. is the devil you know.

Read More: Homecoming time: Money pours back into U.S. markets

The Canadian Dollar continues to lose its luster. Falling natural resource prices and the credit crunch have combined to exact a devastating blow on the Canadian economy, causing it to actually contract in the most recent month for which data is available. Now, the Central Bank is predicting that the economy will expand by only 1% in 2008. Most economists expect that Canadian Monetary Policy will soon lag US policy, especially if the Fed raises interest rates to combat inflation. Based on these developments, the consensus is that the Canadian Loonie is significantly overvalued, and will lose some of its value over the next few years, falling to a more sustainable level against the US Dollar. Bloomberg News reports:

The loonie will slide to C$1.05 by the end of December, and to C$1.09 by the start of 2010, according to the median estimate of 31 strategists surveyed by Bloomberg.

Read More: Loonie Loses Currency Wings as Canada Hurt by U.S.

As the Chinese Yuan has appreciated over the last three years, and even in the decade leading up to the sudden revaluation, a tremendous amount of speculative "hot money" poured into China. Periodically, the government and Central bank have attempted to stem some of these inflows by creating deliberately unfavorable conditions for foreigners to invest in China. Witness the unnaturally low interest rates and the one-way convertibility of the Chinese Yuan. Now, with inflation running at a 10-year high, the government is becoming more serious in its efforts to clamp down on some of the factors that are driving demand. As a result, it altered its system for governing forex and will increase its oversight over the entities and businesses that import capital into China. If executed properly, much of the upward pressure on prices, and the RMB itself, could be relieved. Reuters reports:

NEW RULES: China operates "a managed float exchange rate system based on supply and demand".

OLD RULES: China has "a single exchange rate system" with the central bank announcing the yuan's value against major currencies on a daily basis.

Read More: China's new forex rules

The parallels between the Australian Dollar and the Canadian Dollar are remarkable! Both currencies are backed by economies highly dependent on natural resources. Both countries' Central Banks are considering rate cuts in response to slowing growth. Finally, both currencies have slipped well below parity with the US Dollar. Unlike the Canadian Loonie, the AUD had never quite breached the mythical 1:1 level with the USD. Furthermore, given the deteriorating economic picture in Australia, parity is off the table for a long time.

Demand for Australia's vast natural resources had begun to taper in response to rising prices, and now that prices have softened, exports are off even more. The Central Bank of Australia is indicating that it considers this drop in demand more of a threat than rising inflation. Accordingly, it will attempt to cushion the blow by lowering rates, perhaps as soon as next month. The Australian Dollar's status as a beneficiary of the carry trade- because of the lofty 7.25% benchmark interest rate- may soon come to an end. Bloomberg News reports:

Investors have increased bets the central bank will cut borrowing costs. [It] will lower the benchmark rate by 91 basis points, or 0.91 percentage point, in the next 12 months, showed [one index].

Read More: Australia Signals First Rate Reduction in Seven Years

2007 was a momentous year for the Canadian Loonie, which rose 17.5% and even reached parity against the US Dollar. 2008 has been somewhat less kind to the Loonie; it has been battered repeatedly from falling commodity prices and the global credit crunch. Actually, even before the price of oil peaked near $140, the link between the Canadian Dollar and natural resources had begun to break down. The rationale among investors had shifted such that expensive commodities were now seen as a drag on global economic growth, and hence, bad for Canada in the long-term. Using this logic, the currency should have received a reprieve from falling prices, but this was interpreted as bad for Canada in the short-term. In other words, a lose-lose situation. Perhaps, the Loonie climbed too high too fast, and a simple technical correction is in order. The Guardian reports:

The Canadian dollar has been stuck in a tight range since the end of last November. If the Canadian currency eventually closes below the low end of that range, it would be considered a sign of U.S. dollar bullishness and likely open the door to further losses.

Read More: Canadian dollar feels heat of economic slowdown

Last week, the Forex Blog covered an IMF report that claimed the period of Dollar hegemony is nowhere near finished. This view appears to be widely held, and an American economist argued in a recent op-ed piece that the Euro still trails the Dollar in terms of global prominence. Certainly, he acknowledged the collapse in confidence that has sent the Dollar spiraling downward over the last few years. Central Banks are holding an ever-increasing portion of their reserves in alternative currencies, namely Euros. Many new bond and stock issues are denominated in Euros. But ultimately, the Dollar is still Numero Uno.

However, the potential exists for the Euro can one day catch up the Dollar, such that the world's financial system would rest on two equal pillars. The key, argues the aforementioned economist, lies in better governance. The European Monetary Union lacks coherent leadership, preventing it from projecting power outside the EU and increasing the role of the Euro in the global economy. In addition, the process by which EU economic and monetary policy is determined lacks transparency. The current structure encourages members to act selfishly, and there is tremendous disagreement and controversy surrounding even minute issues. Until this system is reformed, the Euro cannot seriously hope to compete with the Dollar.

Read More: Reforms that would help euro punch its weight

The exchange rate between Zimbabwe's local currency and the US Dollar is currently 110 Billion:1, give or take a few zeroes. This complete collapse in confidence surrounding the currency is redolent of post-war Germany, when a wheelbarrow full of Deutsch Mark was required to buy a loaf of bread. The same hyperinflation, estimated at 100,000,000% on an annualized basis, has gripped Zimbabwe, causing prices to skyrocket and the local currency to plummet. As a result, the Central Bank has announced a plan to redenominate the currency by removing 10 zeroes from notes currently in circulation. Analysts agree, however, that this move is merely symbolic, and unless the Central Bank comes up with a comprehensive plan to fight inflation, they may have to repeat the re-denomination process later this year. Voice of America News reports:

Economist John Robertson agreed the zeros will soon be back on notes without a concerted effort to tackle the root causes of hyperinflation. Journalist Jonah Nyoni commented that what needs to be removed is not the zeroes from the currency but the leadership of the country.

Read More: Zimbabwe's Central Bank Snips 10 Zeros In Currency Redenomination