Although there is no new government money going into the Citibank coffers following the announcement of potential conversion of preferred for common share status, investors are concluding that systemic risk is growing and not falling. Today the dollar is once again emerging as the ultimate fantasy island survivor as more currency traders cast their votes against any remaining contenders. The dollar is a penny higher against the euro at $1.2640 this morning and reached a high for the week against the Swiss franc at $1.1714. As it flexes its muscles, a rising dollar is forcing a growing number of commentators to sacrifice long-term deficit-related pessimism over the dollar on the altar of price discovery thrust into their faces as fresh bad news is delivered.

The 800-pound gorilla in the room has been the growing budget deficit as government borrowing creates a yawning gap. We have refuted this aspect before in that in this global meltdown, every other nation's budget gap will become a function of that of the U.S. In other words ALL governments will have to replace private demand through government spending and deficits will become relative. The dollar also received a vital shot in the arm this week as more investors are again having to abandon the view that overseas governments, central banks and private agencies will no longer step up to the plate and swallow the growing debt issuance. This week at the five-year note auction there was a huge indirect appetite for debt from overseas agents. It's hard to maintain a dollar short position based on a long run view when the position loses money to hotter intra-day flows of global capital.

The dollar did lose out to the Japanese yen overnight and recoiled to ¥97.86. There are a few factors at play. There has been a run on the yen and as ever, investors get overly excited sending prices to an extreme and creating a vicious snap back as the last seller tried his luck. Some even think the move was overdone. Second, since it's the last day of February, many Japanese companies are repatriating overseas earnings, which naturally have to be converted to yen. Third, despite dire industrial production numbers overnight showing a 10% plunge in January's output, the revision to final fourth quarter growth in the U.S. showing a 6.2% contraction makes the Japanese contraction of over twice that amount a little better. Expect further yen weakness next week.

The euro today made a new low for the week and is down on last Friday's close. Having reached almost $1.30 against the dollar during the week, when the technicians look at the chart after all of the hubris and melee, it's going to look like a pretty bearish performance and we reiterate the appeal of $1.2330 below here imminently.

Here's an interesting note to make. This week American financials rallied sharply thanks to the start of so-called stress testing at the nation's top 19 banks. By Friday, however, increasing government intervention at Citibank was apparently failing to allay fears over its viability. Now, while that's a far-cry from a statement of going concern apparent in GM's quarterly report by its auditor, the reality doesn't instill economic confidence any. So today's announcement in Europe of a triple-legged stance from the EBRD, the EIB and the World Bank standing firm with as much as $31 billion in assistance for the central and eastern European banking system doesn't really instill much confidence either. While eastern European currencies may have rallied today on the news, we'd flag the reality of what's happening to the U.S. financial system as a precursor to further developing currency turmoil next week.

Earlier this week we clung to the view that dissipating volatility across asset classes was mistakenly being interpreted as a sign of recovery. We noted to watch the commodity dollars. Both the Aussie and Canadian are sharply lower today and again at fresh weekly lows versus the dollar proving that price discovery beyond the hubris is key.