There are many commentators calling for a continued decline in the dollar and with the rally in the Euro to continue till at least 1.40 against the dollar following the Quantitative Easing announcement by the Fed. The impact of QE where the dollars printed go to fill the gaps in the balance sheets of big banks is being broadly considered bearish on the Dollar.
However, it may not be what it seems to be when it comes to inflation, and perhaps the longer term value of the dollar, especially against the Euro. The Fed's objective is to maintain asset prices at a level which allows debt servicing to continue. As long as lenders use prudent lending standards with their balance sheet's Fed Enhanced lending power, it is unlikely to result in a credit bubble which will drive run-away hyper inflation.
During this credit crisis the ECB and its most powerful members have been consistent in being the Johnny Come Latelies. John Mauldin's Investor Insight has a detailed discussion about European Banks. European Banks are in worse shape than the US banks with their Eastern European Exposure along with the US Sub-Prime and their own Real Estate Bubbles. Basel II Accounting Rules give them a lot more leeway to take on leverage and like bankers true to their spirit, they did.
In my view the Euro is a short until the EU monetary union's administrative structure is rethought or the currency's value becomes commensurate with EU's role in the 21st century. EU does not have the economic size or the demographics to support their existing monetary clout; and unlike the US they do not have a history of assimilating immigrants to strengthen the productivity and demographic base.
The primary question in my mind is what to short it against, since the mood is against the dollar. A basket of currencies with an overweight of commodity driven currency like the Canadian, the Aussie and the New Zealand Dollars is my choice. The basket under-weights countries which have already boarded the Quantitative Easing train or Currency Weakening Boat like the US Dollar, the British Pound or the Swiss Franc; though any significant weakness in them against the Euro might be good points to add to the position. Everyone is rushing to sell (see USD.EUR and EUR is up 8 days in a row!). This might be another big
macro trade which blows up one weekend when a major crisis erupts in the Euro Zone (see Euro Versus the Commodity Currencies).