Yesterday, ECB President Mario Draghi prepared the markets for an extension of the ECB's quantitative easing. The FX market was also impacted by the fact that Draghi seems to regard the exchange rate channel as the only way to influence inflation. The other factors which he believes to be dampening inflation (the output gap and the oil prices) are outside his sphere of influence. 

"Currency depreciation as a tool of monetary policy: Is the hackneyed term "currency war" appropriate in this situation? After all, the Fed, too, has recently underlined the importance of the USD exchange rate for domestic inflation and growth. A further USD appreciation should make the FOMC even more reluctant to hike rates", commented Commerzbank. 

However, market participants are not really expecting significant US rate hikes for the foreseeable future anymore. Thus, the Fed does not have much elbowroom for potential expansionary surprises, given that nobody believes it to be seriously considering outright easing measures. Minneapolis Fed President Narayana Kocherlakota's plea for a rate cut was largely dismissed as whim. 

It is therefore the US dollar, and with it the other dollar-block currencies, which bear the brunt of EUR weakness. The dollar-block central banks are thought to be following the Fed blindly. Markets obviously believe that they will not respond to any ECB efforts to wager or currency war - or at least only to the extent to which the Fed reacts to attacks. 

"The Japanese yen takes a middle ground. It might seem surprising that USD-JPY responded to the ECB press conference and is trading again in the upper 120s. However, if the ECB really aims at a weaker exchange rate, the BoJ will certainly think that the JPY should depreciate as well. The USD-JPY response to the ECB shows clearly that the markets are smelling another currency war", argues Commerzbank.