The Great Accommodation leads to the Great Devaluation?

It was highlighted today that the Dollar now trades at the lowest level to the Euro since October 26th (see charts at right). Specifically, the Dollar's two-week low against the Euro comes in advance of a report due out tomorrow, which is expected to show Europe's economy had expanded last quarter, thereby further dampening demand for the U.S. currency. However, the escalating headwinds are not new, and the Dollar has remained under pressure for several weeks now. Correlations between risky assets and currencies, the dollar in particular, are at notably high levels. 

This extreme negative correlation, in the case of the dollar is quite possibly predicated upon, amongst a number of things, a hunger for risky assets by foreigners that leaves them needing to hedge their Dollar exposure. Underlying this trend are the accommodative policy measures taken by major central banks, who will likely continue to provide support to risky assets "for an extended period." This implies sustained Dollar weakness, and certainly while rates remain at historic lows under "stable inflation expectations."

More to the point, increased hedging needs are quite possibly undermining the dollar. Take notice of the increasing correlation between the dollar and risky assets, for which the S&P500 serves as a proxy. As one of the most negatively correlated currencies, at nearly -60% return correlation over the past 60 days, the evidence would seem to indicate that foreign investors with domestic assets may be more heavily currency-hedged than domestic U.S. investors with foreign assets.

While global risk sentiment tends to be more sensitive to rate hikes in major countries, with the Fed and ECB in a holding pattern, it is likely that the non-Major countries will see relative appreciation. Evidence is available in the AUD which recently began raising rates and now trades at 0.9352 per Dollar, up nearly 11% since August 31. 

This begs the question, on whether or not central banks' great accommodations in monetary and fiscal policies will lead to the great devaluation of the Dollar?