Two events at the end of the week perfectly framed the dollar dilemma. On Thursday the Philadelphia Federal Reserve Survey of Business Activity for April fell precipitously to -24.9, far more than the -15 that had been expected and much lower than the March reading of -17.45. The Philly Fed Survey, as it is known, is a minor indicator poorly correlated with national statistics, but the result spiked the euro 50 points against the usd, and gave a 60 point rise in the yen.

On Friday Citigroup, the largest American bank by assets, announced a larger than expected first quarter loss of $5.11 billion and the stock rose almost 4.5%. The crucial point in the Citigroup earning report was not the earnings number or even the revenues which were better than forecast at $13.2 billion but the write-downs. At $13.9 billion the losses to Citi’s vast portfolio were in line with predictions but barely half the highest estimates circulating through the market before the release. Coupled with Google’s better than predicted earnings, these results put the two outstanding problems in the American economy in an improved light and the equities and the dollar rallied strongly.

The greatest fear for the markets is that there are more buried mines in the credit crisis. Any indication that banks known to have large securitized portfolios were in danger could cause great damage to investor and trader confidence, particularly now as the fear has begun to recede. But conversely, if those same banks with large positions report smaller write-downs than expected or simply do not produce any unexpected negative surprises the result bolsters market confidence. The second great fear, at least for the equities, and Friday the currency markets took their cues from stocks, is that shrinking consumer spending will curtail corporate profits. Google's better than forecast earnings temporarily put that concern to rest.

This degree of direct trading correlation between equities and currencies is rare. The implication couldn’t be clearer. Any indication that the United States economy is recovering, even if it is from a statistic that does not normally affect the currency markets, has the potential to improve the standing of the dollar.

The US rate and economic cycles are ahead of the Europeans and as the cycle intensifies US GDP and the dollar should outstrip the EMU and the euro. This has been the long term scenario ever since the Federal Reserve began cutting rates last September. But there has been scant statistical support for the conviction that the cycle has begun to turn to the US benefit.

However, some perspective is needed before we write down a turnaround date for the usd. Friday’s bounce in the dollar was mostly reflexive and involved more than a good bit of profit taking before the weekend. The powerful equity run was just the excuse. The all time peak for the euro against the usd was only the day before at 1.5981. Traders may be wary of pushing the euro any higher but until there is sustained improvement in US statistics there will be no turn in dollar fortunes.

Futures have priced out any cut in the ECB rates this year. There is certainly no expectation of a rate increase, no matter the official anti-inflation rhetoric. If there is going to be any change in the rate differential between the ECB and the Fed over the next six months it will only come from the Americans. That is the reason for the far more volatile effect of US statistics on the currency market—change, even dramatic change in the US economic situation or Fed policy is expected, little but economic gradualism and rate status quo is anticipated from Europe.

The euro and dollar have been in a range since early March from 1.5350 to 1.5850 with only this recent spike to 1.5980. Two important levels, if crossed, would confirm positive turn in the usd: 1.5350, the low of the current range, and 1.5200 the 50% retracement of the move up since February, 1.4450 - 15980.

Since early February the dollar has lost an astonishing 10.6% against the euro. Friday’s close at 1.5800 is barely 1.0 % in return. The low of the day at 1.5710 did not even approach the first Fibonacci retracement at 1.5550 (23.6%) of the rise since February. Since last August and the credit crisis the US currency has forfeited almost 20% of its value against the euro. But one could say this is not a new situation.

How long has the dollar been falling against the euro? The difficulty here is in choosing the time frame. Each larger period brings another decline into focus. To take in the longest view, the euro began trading on the world currency markets at 1.1591 against the dollar on the first business day of 1999. It reached its low against the US currency 22 months later in October of 2000 at just below 0.8500. For the next year the euro lingered well below parity. In the first quarter of 2002 it turned higher, crossed parity in the third quarter and has not looked back since. With the one exception of 2005 when the Federal Reserve was raising rates and the ECB was not, the euro has gained against the dollar for six years. Any recovery in the usd must be put into this context. The euro could fall to 1.2500, more than 20% lower than Friday’s close and not even retract 50% of it appreciation over the past six years.