LATEST UPDATE : Dollar Falls Most Against Euro Since 1999 [Link]
In the past few months, the rise in the US$ against every currency except the Yen caught many speculators by surprise. Peter Schiff, Jim Rogers and many others who foresaw the recent troubles the US economy encountered were caught wrongfooted. On hindsight it become clear that as than money that was pulled out of risky assets from around the world when Lehman collapsed was mostly American and when converted back to US$ caused most other currencies to fall. The Yen rose because the Japanese investors were big investors in US and when they pulled their money out it caused the Yen to move up. The rise of the US$ was extended further as in the case of oil by speculative trend following hedge funds that will prounce on these movements and added on their bets as they profit from the trend.
Yesterday, Bernanke cuts interest rates to a range of 0-0.25% and issued a statement that they will do their best to prevent deflation. What will follow is quatitative easing : [Link] to fight the deflationary pressures. Bernanke is also known as helicopter Ben and his critics refer to his tactics as the "helicopter printing press". The Great Depression was a deflationary recession with falling prices. Bernanke, a respected scholar of the Great Depression, has written several articles [found here] that the Great Depression could have been avoided if the US Fed had ease monetary policy. It looks like Bernanke will flood the system with money turning on his "helicopter printing press". Deflationary has to be avoided at all cost because of the large amount of debt in the US - when deflation occurs debt becomes harder to pay back (read here for explanation of this).
I believe the US$ is positioned for a fall because all the factors supporting it in the past few months have disappeared - just like the large reversal of the oil prices which rose from 40 to 140 then the sharp fall to 44. There is a big price to be paid to avoid deflation. As Peter Schiff put it : what is the point of inflating away the debt when it will cost US$400 to fill your refrigerator with food. The price to be paid later is massive inflation. Given the Americans and their govt have borrowed so much to consume, there is just no way to avoid the pain of repayment. If the their currency debased by this helicopter printing press to pay off the debts, the Chinese and Japanese will simply get smart and stop lending them.