In the wake of this week’s events and the panicked freeze that has enveloped Wall Street and the world’s other major financial capitals, the dollar’s strong gains may have reached a temporary lull.

Nothing is certain in these chaotic times, when currency markets respond to rate cuts with strong buying, and international currency exchanges of the Icelandic krona are literally frozen.

This Thursday afternoon, furthermore, is certainly no time to offer strong predictions: the Dow is off an additional 1.5% just during the time these first several sentences were written –and I’m a fast writer.

No, make that a full 2%.

With those two strong caveats in mind, though, let’s take a step back. Flight to safety has been the overwhelming force this week, and despite its home country being the origin of the calamities, the dollar has benefited accordingly. It and the Yen have made short work of most of the world’s currencies, especially the non-majors.

The euro hasn’t fared especially well, especially after EU heads of state showed an unwillingness to address the problem in a highly coordinated fashion.

There’s no doubt, furthermore, that the euro is in for a rough ride for the next while. European banks are still more highly leveraged than their US counterparts, the ECB seems to finally have been slapped awake and has signaled more rate cuts are to come.

–And the Dow is now down 3% from the time I started typing.  Maybe I should stop typing so loudly, it could be freaking out the traders from a thousand miles away… they’re a tad bit skittish these days –

There are signs, however, that the euro might be in for a brief comeback before it continues its decline. Analysts at CBIC World Markets, for instance, think the euro is due to rise to upwards of $1.40 in the next several days. The past three days have seen declining lows for the euro. That strong sign, combined with today’s downward movement in euro-zone government bonds are strong signs that the atmospherics of this week have shifted in favor of a small euro bounce-back.

The G7 meeting on Friday will likely be the end-all be-all of the day, at least in terms of the euro-zone markets, and many are expecting an outcome of the meeting that can at least be plausibly spun as positive – even to today’s hyper-skeptical markets.

– OK, now the Dow is off by 7%. We are all going to die. But seriously, there’s no way there’s no way buyers aren’t going to start coming in. –

The euro already had priced into its value the expectation of significant rate cuts. What is interesting is that yesterday’s coordinated cuts don’t seem to have changed that.

Indeed, the euro might be, in the parlance of our esteemed president, benefitting from the “soft bigotry of low expectations.” The ECB has been so tone-deaf through this crisis that analysts at Citi are making the argument that future rate cuts would actually help the euro against the dollar, as it will signal to traders that the bank is actually serious about helping out the euro-zone economy.

As psychological factors rise in importance vis-à-vis fundamentals, actions become viewed by markets as more and more political. Even actions as purely economic as central banks cutting rates are now treated mainly as political signals.

It’s as strong a reminder as any that, until commercial paper starts to be traded again,the forex market has become an almost purely political affair.

… Well, at -7% for the day, buyers did indeed come in and stage a 150 point rally.  That lasted for about 20 minutes, and now things are back down again. That type of thing is why I prefer the forex market.

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