In the past few months the most talked about event in the currency markets is the dollar losing against other curreniesthe most prominent among them being the euro. This has sparked a debate as to whether the dollar losing ground is a temporary correction or whether it is a sign of things to come. Other important issue doing the rounds is the increasing importance of local currencies especially the Chinese Renminbi. What are the implications of these trends and what are the challenges ahead for the currency markets in the future?

But first a perspective on events of the past few months from the market expert and Chief Currency Analyst, Ashraf Laidi at MG Financial Group based in New York, "Over the last 12 months, the most striking trend in currency markets has primarily been the return to textbook economics, whereupon foreign exchange rates with higher interest rates outperformed their lower yielding counterparts. This pattern had displaced `growth paradigm' which prevailed throughout 2001 when the dollar soared across on Fed's aggressive easing campaign aimed at to combat the looming recession."

With a series of unscheduled rate cuts and as many as 275 bps in the first half of the year, currency markets deemed the Central Bank of displaying resilience in jump-starting global growth, rather than erasing the dollar's yield luster. Since a looming recession was the major threat, the Fed's rate cutting campaign was a big reward for the dollar.

The US-led war on Iraq had resulted in surging risk averseness amid global investors and accelerated the dollar's tumble. US involvement in the conflict would subject US interests to a wave of retaliatory attacks in and outside Iraq. Rising risk aversion led investors pursue currencies with high trade surpluses such as the yen and the Swiss franc, since it meant that none of these had any trade deficits of how to finance. Risk averseness also rewarded the euro with the help of Asian central banks rebalancing their dollar reserves in favor of the single currency.

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