The kitchen sink approach from the Federal Reserve and U.S. treasury in which countless, or at least extremely sizable, amounts of dollars are being thrown at the domestic problem is resulting in a weaker dollar as investors look to central banks where deflation is deemed a lesser risk. As they assess the changing environment for risk appetite they are also sniffing out the commodity currencies of Australia, New Zealand and to a lesser extent Canada is those likely to benefit from a rebuilding of the structure of America. While the negative feel against the dollar is growing, early U.S. trading is seeing the dollar strengthen against both euro and Japanese yen. Today the U.S. dollar trades at $1.3525 against the euro and ¥97.15.

The underlying premise supported by the Fed’s purchase of government debt and the treasury’s balance sheet expansion is that, while the efforts might step up the arrival of an eventual recovery, it will do so at a grand cost of inflation. It will be interesting going forward to hear the response from treasury secretary Geithner as to the movement in the dollar, which is diametrically opposed to the performance of a stock market hoping to high heaven for a rebound in activity. We doubt he’ll admit that inflation is a necessary evil twin to his plan and we expect him to reiterate the mantra inherited from past incumbents, that the U.S. has a strong-dollar policy.

What does confound us is the sudden appeal that the euro has found. The intransigence if the ECB is clear in that it is both behind the times and curve. The sensation felt by currency investors that the Europeans might somehow get a free-ride on the back of a U.S.-led recovery is a myopic one at the very least. Dealing with the structural problems exposed by the banking crisis is a step the European banking system must inevitably face on its own. In a weekend interview with the Wall Street Journal, ECB president, Jean Claude Trichet once again explained the downside of a zero-interest rate policy and again stressed that such a policy wouldn’t be appropriate for its region. It’s going to be a pretty tough uphill battle to expand credit with a broken financial system and one which is spreading to its would-be members of Eastern Europe.

The yen continues to weaken and is once again lower against both Euro and dollar. Against the former it has sunk to ¥131.46 today as confidence among Japanese manufacturers fell at its hardest quarterly pace on record.

The pound continues to rise against the dollar and has added to Friday’s gains against the euro. At $1.4531 sterling is almost one penny higher against the dollar while one euro today buys 93.15 pennies.

With the commodity dollars feeling a reprieve from risk aversion pressures, they also find the wind at their backs as investors propel stocks higher in hopes for a recovery. The question shouldn’t really be whether this can continue faced with incredible uncertainty over the success of this plan, rather it should be how long will the dollar’s reputation be tarred for in light of the current policy response. Already the euro is losing some of its impetus.