The noise is over, the dust has settled, there has been 24 hours of trade since the Fed opened the door for the majors to take a chunk out of the dollar, and we are back to January 2009 valuation on the majors. For all of the drum banging and shouting and hollering we are only just about making a reversal move on the dollar index that has been six month overdue it seems. So how weak will the Usd actually get, and what pairs will it really lose ground to?

The answer may not be that one currency pair loses ground, if that is what the global economy wants to see happen and if market participants allow, but rather that the global commodity and equity markets start to attract speculative interest in the near-term. The ability for commodities to move higher may not come as a supply/demand play, but more as a relief rally that allows beaten down markets to move out from under the dollar security blanket.

Looking at each region that backs each of the major pairs we can see little difference in the growth outlook to that of the U.S., no better employment data, and no more chance of GDP growth from any of them that would easily outstrip the U.S. The main difference seems to be in debt levels and business cycle timeframes. The Federal Reserve is the banker for the U.S. government and has five pre-set mandates that allow it wide reaching powers that no other central bank can match. What really seems to have weighed on the dollar this week is the fact that the Fed are looking to use one of their mandates to print dollar bills without increasing reserve levels. In other words, new debt will be issued to cover old debt commitments, and the interest on the new debt will be paid for from newly printed notes in the future, none of which will have more than the minimum 10% reserve backing them.

So maybe it is the size of U.S. debt that allowed the dollar to lose ground and when added to the fact that the U.S. business cycle from peak to trough is half that of the major economies that debt issue really comes into focus. There will be no tears shed at the Fed in regard to a weaker dollar, the recent Usd strength has impeded the trade balance, increased the base cost of overseas purchase of U.S. debt, and imbalanced the value of existing reserve levels.

The dollar may start to give up ground to the euro in reaction to oil prices increasing, to the aussie in connection to higher yielding assets becoming attractive, to the swissy in regard to Treasury note values, and possibly to the cad and pound if global markets can show growth. Let us not forget however that a stronger regional currency creates its own issues as well, the four major economies have fed off twelve months of dollar strength, and now may not be too keen to see a big re-valuation.

No major economy really is that much better off in terms of potential growth, but all of them are far better off in regard to the amount of forward debt and interest provision that will cut into those growth numbers.

So where are we? At a dollar index crossroads, and one that now has major price hurdles to get through. A failure to break the dollar down now may signal that the bear equity market still has legs, and that the speculative interest in the gold and oil markets may just move back to the Treasury markets. That will also take us back to the one day up, one day down trading pattern that has dogged the market for the best part of a year now. A sustained break on the dollar index that moves things from 85 to 80 will bring into play 500-1000 pip moves across the majors, with the beauty of it that it should come fairly quickly now that the initial moves have been put in place, if the markets are looking to buy into the weaker dollar story that the Fed has allowed to leak out.