On the basis of a 25% appreciation against the Dollar, 2008 marked the strongest year for the Japanese Yen since 1972, as the credit crisis caused a rapid unwinding of carry trades as investors abandoned risky positions. 2009 may not be as auspicious for the Yen, however, as a bevy of factors coalesces to halt its upward progress. First of all, global credit and forex markets have begun to stabilize over the last few months. The seemingly unending US government bailout has restored confidence in riskier sectors, such as the automotive sector. Coupled with a cut in Japanese interest rates, investors are being lured back into the carry trade. In addition, Japanese economic officials are becoming more vocal about the Yen's rise, which is threatening to send the export-dependent economy into another deep recession. It is therefore conceivable that the Central Bank could intervene on behalf of the Yen, despite the pleas of the G8. Bloomberg News reports:

Read More: Yen Weakens as Carmaker Loans Revive Confidence in Carry Trades

Anyone curious about whether China is intentionally allowing the RMB to depreciate, need look no further than the Central Bank's latest forex reserve figures, which registered a decline for the first time in nearly six years. At the same time, Chinese trade figures indicate that exports fell for the first time in seven years, which limits the government's ability to build up new reserves. As a result of the credit crisis, it's conceivable that the Central Bank will continue to spend down its reserves in order to provide a boost to its faltering economy. US President-elect Obama will have to deal with such forces if he wishes to successfully take on China's currency policy. Otherwise, the RMB currency could appreciate in 2009, bucking its trend over the last few years.

Read More: China's forex reserves fall

As 2008 comes to a violent end, forex analysts are releasing their predictions for 2009. Most believe that risk aversion and interest rate discrepancies will cease to weigh on forex markets, especially compared to 2008, when investors unwound carry trades and parked their money in low-yielding (but apparently less risky) US and Japanese securities. Instead, investors will probably begin to focus more on economic fundamentals. With regard to the Dollar, this approach could work either way. On the one hand, it is conceivable that the US will outperform (this could translate into a milder recession) the EU and Japan, since the Fed's interest rate cuts were implemented at such an early stage. On the other hand, the US twin deficits continue to expand, which suggests the possibility of long-term inflation as well as a potential reluctance in foreigners to continue to lend to the US. Marketwatch reports:

To be sure, the dollar's 2009 trajectory depends a lot on what the U.S. and global economies do, and when they do it. The U.S. recovery could begin midyear, or the clouds could linger until the fourth quarter or even longer.

Read More: Dollar faces correction, but could head up in 2009

The perfect economic storm continues to brew in Russia; the financial crisis is sapping demand for Russian securities, and a decline in the price of oil (as well as other commodities) has turned the balance of trade from surplus to deficit. As a result, Russian banking officials seem resigned to a depreciation in the Ruble, but are understandably averse to a sudden devaluation, which could shock the economy into complete collapse. Nonetheless, in the last week, the currency recorded record drops as the Central Bank took advantage of Dollar weakness to adjust the band in which the Ruble is permitted to fluctuate (read: decline). Given continued weakness in the price of oil, combined with a faltering economy and surging domestic unemployment, investors should continue to expect precipitous drops in the Ruble, as it sinks to a sustainable level. Bloomberg News reports:

Troika Dialog, the nation’s oldest investment bank, and Goldman Sachs Group Inc. predict the ruble will have to weaken by at least 20 percent against the basket to reignite an economy stymied by a 62 percent drop in oil prices since July.

Read More: Ruble Falls Most Against Euro Since 1999 on Double Devaluation

More than a week after America's Federal Reserve Bank slashed its benchmark interest rate to the historic (low) level of .25%, investors are still struggling to assess the implications. The immediate reaction was mostly positive, as Central Banks around the world (namely Hong Kong and Japan) quickly followed suit, and stocks rallied. In other words, investors were buoyed by the belief that Central Banks can and will employ all available financial tools to maintain acceptable liquidity in financial markets and to prevent the economic downturn from turning into a depression. On the other hand, forex traders were understandably dismayed by the growing gap between US and foreign interest rates, as well as the inflationary implications of the Fed's plan to essentially print money and inject it directly into the economy. The Associated Press reports:

"While there was applause for the (Fed) cuts...investors are now standing back and reflecting further on what that means," said...an analyst. "Some nervousness has been expressed in the currency markets. We have seen a weakened dollar, which has probably had an effect on the markets across the board."

Read More: World markets mixed after Fed's historic rate cut

If ever there was a case for Japanese intervention in forex markets, it is now. The Yen has emerged as the unquestionable victor from the credit crisis, having appreciated against every major currency and notching a 13-year high against the Dollar. Japanese exports have plunged, inducing the country's first monthly trade deficit in almost three decades. Meanwhile, corporate profits are sagging as a result of forex conversion losses, and the unemployment rate could soon set a new record. Notwithstanding comments to the contrary by a high-ranking official, however, the Central bank of Japan is perhaps unlikely to intervene on behalf of the Yen, if only for political reasons. The G7 countries, namely the US, have urged Japan to allow the market to run its course, as it hopes the weaker Yen can help restore some of America's export competitiveness. The Asia Times reports:

Japan will be criticized internationally, especially by the US, the country's strongest ally, if it acts to stem the currency's gain as US automakers are still on the brink of bankruptcy. The stronger yen drives up the price of cars imported to the US.

Read More: Japan to live with yen burden

The British Pound has fallen so sharply in 2008 that parity with the Euro isn't that far-fetched. The problem is that the UK economy now closely mirrors that of the US, minus the perceived "safe haven" aspects. In fact, the UK now has a twin deficits problem of its own, with a trade imbalance that exceeds 4% of GDP and government spending set to rise in response to the credit crisis. Meanwhile, UK interest rates have already been reduced drastically, and could fall all the way to zero, again mirroring the US. The combination of cheap money and higher imports is raising the specter of inflation, and frightening away foreign investors. Under ordinary circumstances, a cheaper Pound could be an effective remedy for recession, but when the entire global economy is reeling, it probably can't accomplish much. The Telegraph reports:

Even though sterling has fallen, exports orders remain weak. Competitive devaluations rarely work. But they have no chance of when the rest of the world is slowing too.

Read More: Weak sterling means the UK will take a pounding

Several years ago, Ben Bernanke earned the nickname "Helicopter Ben" by joking that the Fed would drop Dollars from helicopters if the American economic situation ever became desperate enough to warrant it. In hindsight, the bestowers of this nickname could not have been more prescient, as the Federal Reserve Bank has now officially pledged to do everything in its power to stimulate the flow of money, short of literally dropping currency from the sky. Capital markets naturally reacted to this policy prescription with delight, as some of the surplus dollars will certainly be used to bid up and stock and bond prices. Currency markets, on the other hand, were not so complacent, sending the Dollar back down from the depths from which it only recently emerged. In other words, zero-interest rates and a surfeit of dollars hot off the printing press has analysts and forex traders wondering aloud about who will be foolish enough to want to own Dollars in the future. The Wall Street Journal reports:

Read More: Is the Medicine Worse Than the Illness?

The last two weeks have proved the old adage, "What goes up must come down." In other words, the year-long Dollar rally has begun to fade, as investors once again embrace economic reality. Previously, Dollar strength could be largely attributed to exit trades out of other currencies, rather than any substantive benefit of investing in the US. Now, risk appetite is slowly recovering, having received a boost from the just-completed government bailout of the US automobile industry. Less concerned about risk/volatility, investors have taken to re-assessing economic fundamentals. In the case of the US, unemployment is rising, the twin deficits continue to expand at a breakneck pace, and the interest rate disparity between the ECB and Fed will remain in place for the near-term. The Wall Street Journal reports:

Whether the dollar will continue to weaken is a matter of debate. Currency strategists caution that the dollar often is weaker toward the end of the year, particularly against the euro, as companies and investors adjust bets.

Read More: Less Panic Puts Pressure on Dollar

Since its introduction only ten years ago, the Euro has ascended at an incredible pace. Perhaps the best proxy for its respectability is its growing share (currently estimated at 27%) of Central Banks' foreign exchange reserves. Still, most analysts reckon that the Dollar will remain ascendant for the near-term. For one thing, the perception remains that the US is the safest place to invest, and in fact this attitude has been reinforced by the current economic downturn. In addition, there is very limited doubt that the Dollar will be around for a very long time, whereas there are many skeptics who invariably insist that the Euro is on the verge of breaking up. In short, as the global economy rebalances itself, reserve accumulation will slow generally, and diversification into the Euro will slow specifically. Marketwatch reports:

In view of the value already tied up in holdings of U.S. government paper, it would take a decisive -- and probably foolhardy -- shift for the world's largest reserve holders in Asia or Latin America to transfer significant holdings of present reserves out of the dollar and into the euro.