The economic situation in Indonesia is similiar to that of several other emerging market economies, characterized by falling export revenue, shrinking government coffers, and capital flight. The consequent decline in the Indonesia Rupiah has almost become self-fulfilling. In other words, as skittish investors rush to move their capital out of Indonesia for fear of complete collapse, they are simultaneously making such a collapse more likely. Indonesian policy-makers are conscious of this tendency of nervousness to feed back into itself, and are delicately trying to avoid shocking the markets. On the one hand, they want to limit the decline of the Rupiah. On the other hand, they don't want to take actions that will make investors nervous, even if it means making it more difficult for them to short the currency. The International Herald Tribune reports:

Last week, Indonesia changed its currency rules to make it more difficult to buy foreign exchange. The measures, mostly affecting Indonesians rather than foreigners, would make speculative bets against rupiah depreciation more difficult.

Read More: Indonesia undergoing currency crisis

The European Union has unveiled an economic stimulus package to match the US, as the two economies continue to mirror each other's strategies for fighting the credit crisis. Given the evident lack of effectiveness of the US plan, it is no surprise that analysts reacted pessimistically to the policy proposal. At this point, investors and consumers alike appear resigned to the inevitability of economic recession in both economies. In other words, there isn't much that government can achieve, as their respective efforts will certainly be undermined by increased saving. Besides, investors (including currency traders) remain focused on the financial aspects of the credit crisis, rather than the economic aspects. Accordingly, the theme of risk aversion continues to dominate, as part of a trend that favors the Dollar. Reuters reports:

Analysts said that the plan marked a step in the right direction, but uncertainty about its efficacy, and general concerns about a deep slowdown in the global economy were keeping investors in the mood to sell risky assets.

Read More: EU stimulus package raises concerns

The Treasury Department's most recent attempt to stabilize credit markets involves an injection of $800 Billion into the banking sector. According to one estimate, the total amount of Federal money committed so far (in the form of investments, guarantees, and loans) now exceeds $7 Trillion, and shows no signs of abating. In theory, the possibility exists that such investments could prove profitable, in which case the bailout wouldn't end up costing taxpayers a cent. In all likelihood however, a significant portion of these investments will have to be written off, causing a net increase of trillions of dollars to the money supply. In the long-term, this is certain to be highly inflationary. It seems currency traders have finally begun to take note of this inevitability, and the Dollar rally has stalled accordingly. The New York Times reports:

The Federal Reserve and the Treasury... [are] sending a message that they would print as much money as needed to revive the nation’s crippled banking system.

Read More: U.S. Details $800 Billion Loan Plans

Having endured years of abuse from free-market advocates and the International Monetary Fund, fixed exchange rate regimes are officially back in vogue. This is because the sole currencies not to have been affected by the recent surge in forex volatility are those that are pegged to the US Dollar, namely the Chinese Yuan and Hong Kong Dollar. Both countries have stood by calmly as other emerging market economies have witnessed speculators lay waste to their currencies, driving them down by 5% or more per day. Fortunately, both HK and China have significant stockpiles of foreign exchange reserves, which virtually eliminates any possibility of a speculative attack. Iceland, meanwhile, was forced to abandon a half-hearted attempt at a currency peg when it ran out of cash to defend it. Of course, a fixed currency can also be a disadvantage, as exports may become expensive relative to competitors that experience declines in their currencies. Given the current economic climate, however, it seems HK is happy to give up this potential upside in favor of stability. The Wall Street Journal reports:

Like Japan, Hong Kong was a source of funds for the carry-trade. Turbulent markets have taken that strategy apart, and investors who borrowed in Hong Kong are pulling money back into the territory at a rapid clip.

Read More: Hong Kong Loves Its Currency Peg

The last few months have born witness to an unprecedented level of volatility in forex markets, to say nothing of the fluctuations in other areas of securities markets. Emerging markets currencies in particular, as well as a handful of industrialized currencies, have crashed violently, as a process of de-leveraging continues to send capital back to the US and Japan. This instability has led some policy-makers to revive an erstwhile exhortation to limit the role of speculators in forex markets, who collectively may account for as much as 90% of daily forex turnover. Specifically, a 1% tax on all forex trades has been proposed, which would be deducted automatically and used to finance infrastructure projects around the world. It has also been suggested that forex markets follow the lead of equity markets by adopting a so-called "up-tick" rule, which would be used to counter sudden waves of predatory short-selling that can cripple a country's currency in minutes. CSRwire reports:

Such bear raids are rarely to "discipline" a country's policies, as traders claim, but rather to make quick profits. In the transparent FXTRS system, traders selling falling currencies begin to see that the rising tax is cascading into the country's currency stabilization fund and cutting into their gains.

Read More: Why Obama Missed Bretton Woods II

The consensus among economists is now that the US Federal Reserve Bank will lower its benchmark interest rate all the way to 0%. The Fed Funds Rate currently stands at 1%, and two projected 50 basis point cuts within the next two months would bring the rate to its lowest level ever, where it could remain for as long as one year. Apparently, the concern among economic policymakers is that the sagging economy and falling asset prices will ignite a protracted period of deflation. Given the extent to which the Federal Reserve Bank as well as the Federal Government have already moved to stimulate the economy, it's unclear whether any further loosening will have an effect. Currency investors remain unfazed about this prospect, perhaps because the rest of the world is in equally dire straits, and foreign central banks are mulling proportionately drastic measures. Marketwatch reports:

"This [interest rate cut] move confirms a highly pro-active and aggressive central banking community and there will be more to come" from the Bank of England and European Central Bank, said one currency strategist.

Read More: High-yielding currencies under pressure

After rising nearly 20% over the last three years, the RMB has virtually stopped appreciating against the US Dollar, perhaps as a result of the credit crisis. At the same time, the US exports sector- previously one of the few bright spots of the sagging economy- has begun to stall. US Politicians have taken note, and are now renewing their efforts to persuade China to allow its currency to rise further. They are also agitated about China's perpetually growing forex reserves (currently estimated at $2 Trillion), which are increasingly being deployed in sensitive areas. Meanwhile, the Chinese economy is growing at the slowest pace in years, and the Chinese government is resorting to desperate measures to prop it up. In short, allowing the RMB to rise, while placating US policymakers, is tantamount to economic suicide, and hence unlikely.

While other sovereign wealth funds have existed for nearly 50 years without controversy, "China appears far less likely than other nations to manage its sovereign wealth funds without regard to political influence that it can gain by offering such sizable investments."

Read More: US panel urges action on China currency, investing

Since the credit crisis heated up several months ago, the theme of risk aversion has predominated in equity markets. This is also true in forex markets, where deleveraging and a shift to perceived investing "safe havens" has led to a collapse in the carry trade, leading to a sharp rally in both the Dollar and Yen. In fact, the recent rise of these two currencies has coincided remarkably with stiff declines in the prices of virtually every class of risky asset.

Read More: Currency Trading Markets Remain Highly Correlated to Dow Jones, Crude Oil Prices

It's a little-known fact that the US Federal Reserve Bank does not actually set interest rates. As a result, there is often a discrepancy between the "suggested" Fed rate and the actual rate. Since the onset of the credit crisis, this gap has widened considerably, such that the "effective" benchmark interest rate is nearing 0%. Some commentators are beginning to draw parallels with Japan, where interest rates have remained close to 0% for several years. If/when the global economy finds its footing, the Dollar could follow the lead of the Yen, and once again find itself a funding currency for the carry trade. The Economist reports:

If the effective rate remains near zero, the Fed will have to turn to more unconventional means of stimulating growth.

Read More: The Federal Reserve - Turning Japanese

The British Pound has already fallen 25% against the Dollar, since the credit crisis kicked off earlier this year. On a technical basis, therefore, it would seem that the Pound is due for a rally. From the standpoint of economic fundamentals however, the picture is quite bleak. While the Bank of England's recent 150 basis point interest rate cut could help restore the UK economy to solid footing, it sent a massive shock to investors. UK interest rates now stand at a 50-year low, and futures prices suggest that the benchmark rate will fall another 1% in the next 12 months. In addition, the Bank of England has not ruled out ruling interest rates all the way to zero. As unlikely as this scenario may be, investors are now fully aware of the scope of Britain's economic troubles. The next couple weeks could be make-or-break for the Pound, as a series of economic data releases, as well as the minutes from the latest BOE meeting, will help investors craft a more accurate forecast. Daily FX reports:

Housing, industrial trends, consumer spending and public borrowing readings...provide additional confirmation that this evolving recession will be far worse than the slump of 1992.

Read More: British Pound Could Forge New Lows As Rate And Growth Outlook Fail