Nothing like a good old currency war to warm the cockles of one's heart just as the Holiday Season brings its first snow and temperatures begin to drop in line with our greenback's continual decline. There was a nice span there for the better part of twelve months when the Dollar was strengthening and the press began to wonder what it would be like to have a strong currency once again. However, this trend was only temporary, driven more by risk adversity and lacking the steam that true fundamentals would engender. In the past decade there have been two recessions, multiple asset bubble collapses, and two unfunded wars, much too much to ask of a single currency to withstand.

For the past few weeks, the market has incorporated its assessment of the potential impact of the Fed's QE2 program, leading to further declines and igniting acrimony around the planet about unjust currency manipulation tactics. Chinese officials have long avoided looking in the "manipulation mirror" concerning their Yuan, but they have been quick to observe their own tactics when emulated by another. The Chinese are not alone. All emerging market countries have been vocal in their opposition. The simple fact is that QE2 and any similar programs to follow are nothing more than a hidden trade tariff that escaped any treaty ratification process.

Regardless of the rhetoric, the U.S. Dollar traded pairs still constitute 72% of the forex market, per the chart below, and even more if you throw in the Kiwi and other minor crosses. The Dollar has nearly hit bottom, if you check the latest weighted average index for the currency. Over time, the major currencies tend to move in waves as relative valuations reflect the non-homogeneity of global economies. The past decade, however, may be stretching out normal wavelengths to something not witnessed for some time.

Note: Past performance is not indicative of future results.

For long-term fundamentalists, the theory of "reversion to the mean" comes to mind. In a "closed system", as we have now due to globalization trends, all economies are interconnected. Academicians do not favor the argument that any economy can "de-couple" itself in these days and times. If we ignore the commodity currencies and focus on the primary four above, what would a weighted index for the past decade look like?

Note: Past performance is not indicative of future results.

The Dollar actually hit a peak at the millennium crossover. By beginning at "1.0" at that point, it appears that the revised "wavelength" is now 20 years, if it has truly hit a bottom at this point. The 10-Year average is "0.814", and its current value rests below the annual curve at "0.714". Are we now in line for a long reversal pattern?

We have stated here before that being "bearish" on the Dollar may not be a prudent strategy at this point. The market may have already adjusted for QE2, and its actual application may reveal that the market has over-compensated, justifying a snap back in the other direction. Most analysts have expected fundamentals to take over once a stable recovery was in place. The rise in commodities, capital equipment orders, and moderate gains in hiring are all pointing in that general direction, but GDP growth targets of 2% a year may also be with us for some time to come. Repair of our trade imbalances and accumulated deficits will take time, perhaps, suggesting that a complementary 10-year upward wavelength may not be that difficult to accept.

Recovery may be slow, but the phrase "deficit reform" has been pounded on the airwaves of late. If Congress can focus on this single topic, then global finance ministers can turn down the audio. Their loud recriminations will have achieved their objective, but in a round about way, and if their voices were not loud enough, our own scions in the financial establishment have been seconding their comments regarding the potential for unnecessary currency wars and their detrimental impacts. The Fed should worry more about defusing asset bubbles than creating them on their own.

The threat of QE2 has already exacerbated the steep run-up in both hard and soft commodities. Low interest rates and returns have forced investors into stocks and bonds, other sectors that are presumed overvalued by many. The Dollar has strengthened following the elections of last week, bouncing off a technical bottom. The Euro is still held hostage by several member state debt concerns, and Japan's central bank will intervene if the Yen moves much higher.

The past decade has been filled with "boom and bust" cycles, and our Dollar has stoically survived them all. The long-term picture would seem to include a reversal of the past 10-year trend, but Bernanke and his buddies will need to change their ways for this scenario to play its way out in the decade to come.