Will the stimulus succeed? That will be the central question driving the currency market in the next few weeks. With Senate late Friday agreeing to the $800 Billion bill its all over but the shouting for the Republicans, but for the rest of the country the economic future remains cloudy as ever.

For the past month the FX market has given the greenback a huge benefit of the doubt bidding it higher despite deteriorating economic conditions. In a complete reversal of the typical dynamic of FX trade, speculators actually punished those currencies that maintained high interest rates and rewarded the ones whose governments were most aggressive in pursuing an expansive monetary and fiscal policy. Witness the trade in EUR/GBP this week. With BoE lowering rates by 50bp while ECB held rates steady, the natural inclination would have been to sell pounds, but in reality the cross was crushed as traders ran away from euros on fears that ECB was doing too little too late.

As we noted last week it’s a global ZIRP world baby, and in an environment where rates are minuscule all over, yield loses its value. Reflation becomes the dominant trade and to that end the market believes that US economy is far more flexible and aggressive in its policy response and therefore is much more likely to rebound first.

Are the dollar optimists right? We have huge doubts. So far the policy direction from the Obama administration has been flawed to say the least. In times that call for revolutionary change he has been a technocratic incrementalist. The banking sector which is the core our economic problems screams for bankruptcy and recapitalization, but the Obama policy prescription has been to keep a terminally ill patient on life support in hopes of a miraculous recovery. Miracles however, happen only in children’s fairy tales and these are decidedly serious adult times.

So in short, no we don’t think that the stimulus will stimulate anything and at best may simply keep things from getting worse. That however, may be enough for now. As we’ve been saying for a long time, the long dollar trade is not really being fueled by optimism over the US economy, but rather by a complete lack of confidence in the EZ region.

Unless US runs into funding problems for its new spending packages the dollar will continue to attract investment flows as the least worst of the bunch.

Boris Schlossberg serves as director of currency research at GFT, and runs bktraderfx.com.