The agreement allows for the creation of a monetary council, a precursor to the Gulf central bank.  The council will be responsible for deciding the level at which the Gulf currency is pegged to the dollar, aligning interest rates, monetary tools and goals.

"As we've seen during past episodes of risk aversion and the unwinding of risk trades, some of those were funded with the yen. As those were unwound it involves buying back the yen and it appreciated against a lot of currencies."

"If you look at the history of timing on Exchange Traded Product launches...you would likely see a lot of products launching right after run-up and launching right into a decline, so I'd rather launch after a decline and into a run-up."

The foreign exchange reserves of Central Banks throughout Asia have been dwindling. The most plausible explanation is that they are using their reserves to intervene in forex markets on behalf of their respective currencies, many of which have fallen dramatically in 2008. The Korean Won, Thai Baht, and Filipino Peso, to name but a few, have each dropped around 15%. While it may seem futile for Central Banks to continue intervening, it is important to remember that the goal may be to slow -not halt- the decline of the currency. In fact, given the current economic climate, most of them will tolerate currency weakness, in order to boost the competitiveness of their export sectors. Reuters reports:

"When the world slows, the policy focus in Asia would very quickly shift from inflation to growth. This means that monetary and credit policies will ease, and weaker currencies will be welcomed."

Read More: Asia's forex intervention may be a losing game

The bad news is piling up in the US: Fannie Mae and Freddie Mac are in such dire shape that they will require the assistance of the US government merely to stay afloat. Meanwhile, Lehman Brothers, a large investment bank, is quickly crumbling a la Bear Stearns and could require a similar bailout. Fortunately for the US, the news across the Atlantic is just as bad, and getting worse. The median estimate for Eurozone GDP growth has been revised downward to an anemic 1.4% in 2008 and 1.2% in 2009. Analysts are speculating that the ECB will finally have to lower rates in order to prime the EU economy, and perhaps the Bank of UK will have to lower rates for a second time. It looks like this Dollar rally still has legs. Reuters reports:

Euro zone economic uncertainty was "particularly high," the European Central Bank president, Jean-Claude Trichet, said after the ECB left its interest rates at 4.25 percent on Thursday.

Read More: Dollar soars to highest level this year vs euro

Over the last couple years, the Central Bank of China has built up a treasure trove of foreign exchange reserves ($1.8 Trillion at last count), as part of its effort to hold down the Yuan, or at least slow its appreciation. Unfortunately, these reserves have depreciated significantly-10% per year in real terms- as the Yuan has risen relative to the Dollar. These reserves may slide further in real terms, as the credit crisis diminishes the value of the mortgage securities that comprise almost 20% of its portfolio. In order to
shore up its capital position, the Bank may be forced to accept an infusion of capital from China's Finance Ministry and halt the appreciation of the Chinese Yuan. The New York Times reports:

China finds itself hemmed in. If it were to curtail its purchases of dollar-denominated securities drastically, the dollar would likely fall and American interest rates could soar.

Read More: Main Bank of China Is in Need of Capital

The Yen has been hammered over the last month, by both the sudden strength of the Dollar and increasing comfort with risk-taking. Now that the US government is set to bail out the two American mortgage giants, Fannie Mae and Freddie Mac, investors are likely to become even more confident that the global economy is in strong enough shape to weather the credit crisis. As demand for risky investments- such as stocks and high-yielding currencies- grows, the Yen (because of low interest rates) will once again find itself as one of the main funding currencies for the carry trade. Of course, risk-aversion is a two-way street, and one stumble in the US economy, for example, would benefit the Yen. Bloomberg News reports:

"The yen is likely to take a hit. A government bailout will certainly stabilize Freddie and Fannie and improve risk appetite for carry trades."

Read More: Yen Drops Most in 3 Months as U.S. Takes Over Fannie, Freddie

While the factors affecting gold are no doubt nuanced, its popularity is primarily vested in the belief that it represents a stable alternative to the Dollar. Accordingly, as the Dollar fell over the last five years, gold prices soared. Likewise, the ongoing Dollar rally has been matched by a proportional decline in gold prices. However, at least one analyst believes this link could soon break down. While gold is traditionally viewed as a specific protection against US inflation (and the concomitant Dollar depreciation), perhaps its role could expand to offer protection against worldwide inflation.

For example, analysts largely agree that the Dollar rally is as much a product of global economic weakness as of US economic recovery. In fact, the monetary and economic situation in the US continues to deteriorate. But, the global economic situation is deteriorating even faster. By this standard, it is conceivable that the Dollar could continue to outperform its rivals. Meanwhile, it is also conceivable that gold would continue to rise, since the long-term economic picture of the US remains bleak.

Read More: Will gold now move separately from the US dollar and euro?

A (deliberately) leaked report has revealed what investors and analysts have suspected all along: the "Committee to Save the Dollar" is real. Evidently, back in March, when the credit crisis was threatening to spiral out of control, the world's leading bankers were busying themselves preparing a plan to prop up the ailing the Dollar. Their rationale is/was that a more valuable Dollar would do more to relieve inflation (via lower food and commodity prices) and ultimately be easier to implement than a worldwide hike in interest rates. Under the plan, the Central Banks of Europe and Japan would join the Federal Reserve Board to coordinate the large-scale sale of Yen and Euro assets, in exchange for Dollars. While the Dollar's impressive rally has thus far eliminated the need for intervention, the long-term prognosis remains questionable. Regardless of economic fundamentals, however, currency traders may be reluctant to bet too heavily against the Dollar, lest the Central banks move forward with their plan. Bloomberg News reports:

None of this means the dollar won't plunge anew if the global credit crunch worsens. For the moment, though, the need for some kind of Plaza Accord-like currency deal has been reduced.

Read More: `Committee to Save the Dollar' May Not Be Needed

Everyone has a theory to explain the Dollar's explosive rally, which has yet to run out of steam. A recent one identifies a shift in China's forex reserve policy as a driving force. Apparently, in an ostensible effort to clamp down on inflation, the Central Bank of China is resorting to draconian measures. One rule change, which was executed with both speed and lack of media coverage, requires commercial banks to hold a larger portion of their reserves in Dollars, rather than Chinese Yuan. In addition, such banks face new restrictions on foreign debt, which is designed to turn them into net buyers of Dollars. Analysts suggest that this policy represents a roundabout attempt to slow the appreciation of the Chinese Yuan. If they are correct, than surely the Central Bank of China has succeeded, for the currency has virtually ceased in its interminable upward march against the Dollar. This upshot suggests that the goal of the Central Bank was not to fight inflation, but rather to avoid a post-Olympic economic slowdown. The Telegraph reports:

They are now more worried about growth than overheating, and you are seeing that play out in the currency markets. There has been a remarkable change of view."

Read More: Beijing swells dollar reserves through stealth