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.

In a recent interview, three emerging market fund managers aired a common view: the asset class which comprises emerging markets represents a solid investment. Their reasoning is that the tremendous declines wrought in emerging market equities and currencies over the last six months were caused primarily by technical factors, rather than a substantive change in the long-term economic picture. In other words, this drop was effected by foreign investors that withdrew money en masse from emerging markets in order to meet fund redemptions and repay loans denominated in Dollars. At the same time, economic analysis, as well as common sense, dictate that an increasing portion of future global growth will be realized in the developing world. Many such countries have invested wisely in infrastructure and built up sizable foreign exchange reserves. Consequently, they are well-positioned to survive the current downturn intact. Accordingly, once investors "come to their senses" and recover their collective appetite for riskier investments, it probably won't be long before emerging market assets and currencies are bid up to pre-crisis levels. Forbes reports:

"Current valuation of emerging markets is the lowest it has been since I began investing in this asset class in 1988. Based on trailing 12-month earnings, emerging markets is trading at a price/earnings ratio of only 7.7x, and a price/book of 1.3x (with return on equity at 17%)," [observed one analyst].

Read More: Emerging Markets: What To Buy

While the credit crisis has led some skeptics to presage the end of the European common currency, some in Central Europe are still eager to join it. However, their cause may have been jeopardized by the credit crisis. The economies of Poland, Hungary, and Czech Republic-the three most qualified candidates to join the Euro-have been plunged into turmoil. Capital flight has wrought precipitous declines in all of their respective currencies. In light of record volatility and continued bearish sentiment, some analysts have argued that the Euro represents the key to their salvation. The only problem is that the credit crisis is scrambling their ability to meet the necessary pre-requisites to membership. Bond yields trade at an unacceptable spread to those of Euro members, inflation has yet to be tamed, budgets have shifted from surplus to deficit, and reserves are shrinking faster than they can be replenished. And yet, there are those who remain optimistic. Bloomberg News reports:

"In Poland and Hungary the crisis has increased the public support for euro adoption and I'm keeping my bet that both countries will enter ERM-2 in the second half of 2009. The more euro-skeptic Czechs may do it a year later," said [one analyst]. 

Read More: Euro Dreams Fade for Zloty, Forint, Koruna on Slump

Having fallen well below parity with the USD, the Canadian Loonie is now being attacked on two fronts. First, there is the deteriorating economic situation. Prices for virtually all commodities, namely oil, have declined significantly this year, dealing a harsh blow to the natural resource-dependent Canadian economy. In addition, its largest trade partner, the US, is suffering from economic woes of its own and is in no position to support the Canadian export sector. The result is surging unemployment and the most precipitous decline in factory production in 25 years. The most optimistic economists are forecasting GDP growth of 0.0% in 2009. The second prong of the attack against the Loonie is being waged unintentionally by the country's Prime Minister, who recently suspended Parliament in order to avoid a no-confidence vote in his leadership. In short, bulls for the Canadian Dollar (not to mention democracy) don't have much to be excited about these days. Bloomberg News reports:

"The global backdrop is bearish for the Canadian dollar and domestic numbers are merely piling on,"said a senior currency strategist. "No one is looking for reasons to buy the Canadian dollar right now. They want reasons to sell."

Read More: Canada's Dollar Posts Weekly Decline on Jobs, Politics, Oil

Only a few weeks ago, investors had made significant bets that China would reverse its official policy of RMB appreciation. Futures prices indicated that investors collectively expected the currency to depreciate over 7% against the Dollar over the next year, as part of a comprehensive Chinese policy to boost the faltering economy. Since then, however, the RMB recorded its biggest one-day rise since the currency peg was abandoned three years ago, and investors subsequently scaled back their bets.

While it's unclear what caused the sudden change in sentiment, there are a few factors which probably contributed. First is Treasury Secretary Henry Paulson's recent visit to China, in which he encouraged China to continue to permit the the Yuan to appreciate. In addition, high-ranking Chinese economic policy-makers have indicated that market forces will increasingly determine the valuation of the Yuan. Finally, there is the recent election of Barack Obama, a long-standing critic of what he believes to be the undervalued RMB. Bloomberg News reports:

"Any attempt to devalue the currency is likely to be met with considerable opposition from China’s trading partners." The new U.S. administration under President-elect Barack Obama "will be less tolerant of the 'crawling peg' appreciation policy," said one analyst.

Read More: Yuan Forwards Advance Most Since Peg as China Seeks Stability

According to the most recent monthly data, the foreign exchange reserves of most developing countries are disappearing faster than they can be replenished. As a result of the global credit crisis, central banks have taken to deploying vast sums of capital towards the dual ends of stimulating their economies and propping up their currencies. The latter can be especially expensive, as countries like Ukraine and South Korea can attest. Both countries have spent 20% of their respective reserves to halt the decline of their currencies, and both abandoned such a strategy after accepting its futility. Ironically, there seems to be a direct correlation between dwindling forex reserves and a depreciating currency, as investor nervousness and currency devaluation reinforce each other. There is one bright spot in this quagmirem, however. The Guardian reports:

China says its reserves are continuing to rise, with the chief economist at the National Bureau of Statistics telling Reuters they would exceed $2 trillion by the end of the year. Beijing [will] not resort to "panic selling" of reserves, instead maintaining a "prudent and responsible" stance.

Read More: Emerging reserves haemorrhage as currencies fall

On the basis of technical factors, the Australian Dollar had halted its precipitous decline against most major currencies. As a result of an unbelievable 100 basis point interest rate cut, however, the currency has resumed its fall. That the rally was short-lived is not a mystery. The yield advantage enjoyed by Australia over the last few years has almost completely evaporated. Combined with lackluster Australian equity performance and tanking commodity prices, foreign investors have little reason to maintain capital in Australian holdings. On the plus side, the rate cut showed investors how serious Australian economic policy-makers are in dealing with the credit crisis. Unfortunately, diligence doesn't always translate into efficacy.

Read More: Dollar back under pressure

When all is said and done, the US government will have injected trillions of dollars into the economy, in the form of bailouts, guarantees, economic stimuli, etc. Whether it will have the desired effect is debatable. The question that no one seems to be asking is, "How is the government going to finance such exorbitant spending?" It appears that China, which has become of of the largest holders of US government debt, will continue to participate- not necessarily because it wants to, but because it doesn't have a choice. China's economy remains heavily reliant on the export sector to drive growth. Because its exchange rate regime does notpermit the RMB to fluctuate freely, the proceeds from the consequent trade surplus must be invested abroad, rather than domestically. For both symbolic and economic reasons, it seems the bulk of the surplus will continue to be invested in the US, probably in safer assets like US Treasury Securities. This is certainly good news for deficit hawks and Dollar bulls. The Wall Street Journal reports:

Even if China wanted to invest outside the U.S., it couldn't. If China recycled its foreign currency into, for instance, the European Union or Japan, it would effectively force those trading partners to run large trade deficits with China, which neither can absorb.

Read More: China Will Keep Buying U.S. Government Debt