Euro Speuro.

It first appeared a half-decade ago as the "Sakakibara Scenario," named after the former Japanese MOF official. The theory was that America's huge current account imbalance was a ticking time bomb. Global investors, sensing the ever-growing imbalances, could soon pull out of U.S. dollar-denominated financial assets and plunge an already over-valued American stock market and the dollar through the floor. Fearing the seizing up of liquidity, the Federal Reserve would panic and slash short-term interest rates, further weakening the dollar. The upshot: a vicious cycle of financial destruction.

That scenario never panned out, but every so often it raises its head. The latest proponent: many European policymakers, who see it as inconceivable that the euro can continue in its relatively weak position against the dollar. It is inevitable, many Europeans insist, that the euro will strengthen once global investors realize that once the U.S. economy recovers, those imbalances could balloon even larger. What's more, they add, last year's massive dollar-boosting European investment flows into U.S. financial assets were a one-time phenomenon.

Maybe so. But complicating this doomsday scenario may be the fact that since European monetary union, the world has essentially moved to a two-currency system (the dollar vs. the euro, with the yen an increasing politicized currency). With most of the world dollarized, the fear of massive capital outflows may have been exaggerated. As one German central banker mused cynically earlier this year, "When something good happens to the U.S., the euro weakens. When something bad happens, the euro weakens. And when something good happens to Europe ... the euro weakens."

This weakness has become a perplexing question for G7 policymakers. Is the euro weak because of the European Central Bank's restrictive monetary policy, or would the euro be even weaker without that policy in place? Perhaps most frustrating is that a lot of the euro-supporting "good" news has already been made public. Previous interest rate and growth differential advantages are fading rapidly. ECB strategists counter that the euro's woes may stem simply from the fact that European investors, who historically diversified among various European currencies, have had no choice but to move into U.S. financial assets with the single currency's arrival. Missing from this argument of course is the fact that massive European capital outflows into the U.S. continue even today, topping $45 billion in January alone.

It goes without saying that the answer may be that the euro is suffering simply from its own sense of newness, a problem that could diminish as time goes by. Still, there are questions.

For example, one troubling concern is a lack of adequate restructuring. After European unification, Germany, the union's largest member, offered an impressive tax reform package. Since then, pension reform has been pathetic and the recent "codetermination" labor market reform proposals are reminiscent of leftist German policymaking of the late 1960's.

Another concern: the ECB control issue. According to some London analysts, the so-called "little countries" may have become a kind of tail of policy uncertainty that is wagging the ECB dog. For example, while Germany, Italy, and France (representing, economically speaking, 75 percent of the union) today are weakening, the overheating smaller economies push successfully for a go-slow approach to ease (backed by a Dutch ECB president whose country is experiencing 5 percent inflation). The troubling question: What happens several years from now if the Big Three are overheating, but the smaller economies are weakening? Would the ECB ease anyway? After all, government pressure on the central banks is already a fact of life in this new era.

Another concern is uncertainty over ECB presidency succession. The issue is tough-minded Bank of France Governor Jean-Claude Trichet and whether he will eventually be allowed to succeed President Wim'Duisenberg or be thrown to the wolves of French presidential politics.

What all of this means is that understanding currency movements today is more an art form than a science. The old rules don't apply. This period probably also tells us how important Alan Greenspan is as a beacon of investor certainty. Indeed, the Fed chairman is probably now de facto central banker to the world in an era when the dollar's strength can wreak havoc with Latin American and Asian economies, and thus the entire financial system. And speaking of succession, should the 74-year-old policymaker decide not to accept reappointment, pity the new guy venturing into this interconnected, global era of madness where few rules apply. Any takers? Send resume and complete psychiatric evaluation to ...