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In the race to the bottom, US dollar falls behind

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If there is a global currency devaluation war, the U.S. is losing.

Of course, that's good news for those who like a strong American currency and the purchasing power it brings.

But it signifies that the grounds have begun to shift in the global monetary policy dynamic, and the repercussions are beginning to set in.

The American greenback has been on a steady upward trajectory against its global competitors, surging to a three-year high as investors flock to the dollar for a variety of reasons.

Partly it's a trade against a weakening euro, which has been the victim of a stubborn sovereign debt crisis.

Part of it is investors bracing themselves for the Federal Reserve to begin easing off on its dollar-stunting quantitative easing program.

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And part is simply a recognition that in a world where slow economic growth has become the order of the day, the weakness in the U.S. appears less threatening than it does elsewhere.

The latter factor has caught the eye of Andrew Wilkinson, chief economic strategist at Miller Tabak, who believes that the dollar strength is more than the simple weakening of the European common currency.

He predicts the euro to weaken level around 1.28 against the dollar all the way into a range between 1.21-1.25.

"Only this time it will not be euro weakness or dire warnings over a breakup of the single currency area exerting its influence on the currency pair," Wilkinson said. "Rather it will be because the slow-to-manifest fundamentals favoring the U.S. dollar have suddenly become too large to ignore."

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One data point Wilkinson favors is the fairly consistent gap between two-year notes in Germany and the U.S. It indicates that while U.S. longer-term yields have surged, the short notes remain anchored.

"The lack of movement suggests some success in the communications policy at the Federal Reserve as it introduces the groundwork for tapering yet leaves alone its assessment for the economy," he said. "In other words the front-end of the dollar yield curve has kept its feet firmly on the ground despite the panic liquidation across distant parts of the maturity horizon."

As far as technicals, analysts have seen fairly large sums poured into speculative dollar trades.

But the current futures load of $26 billion in long positions is well below the $42 billion peak on May 28 as markets feared a hasty Fed exit, Jens Nordvig, analyst at Nomura Global FX Research, said in a note to clients.

(Read More: Why the Fed Might Hike Rates Sooner Than You Think)

"We are still thinking about whether to position for more accelerated USD gains. But the USD positioning picture is mixed (not clean, not max long)," Nordvig said. "The key may be pinpointing catalysts for a further divergence in the pricing of monetary policy outlooks in the U.S. and Europe."

From a markets perspective, the strong dollar's results have been mixed.

Commodity prices, which usually fall on a strong greenback, have only edged lower during the dollar rally, while oil continues to climb higher. Gold prices remain in the virtual free fall that began well before the dollar stiffened.

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The U.S. stock market, the strength of which has coincided with a weak dollar for the past four years, actually shows little historical correlation over the long term and has been volatile but overall higher during the recent dollar rally.

In addition to its surge against the euro, the dollar has jumped against the pound sterling, rising 6 percent since mid-June.

That movement has come as U.K. economic data has weakened and its central bank looks more likely to continue monetary easing.

"Hopes for a strong 2Q '13 had been building for the U.K., thanks to a string of better than expected data for May and June— namely, the (purchase managers index) surveys," said Chris Vecchio, currency analyst at DailyFX. "Now, with official Industrial and manufacturing data unexpectedly worse off than previously anticipated, there is some wind behind the Bank of England's new dovish sails."

Indeed, much of the currency dynamic has been driven by an unusually accommodative time for the world's central banks.

More are following the Fed's lead of zero interest rate policy and extreme QE, which in the U.S. central bank's case entails $85 billion a month in bond purchases.

The Bank of Japan has been the biggest entrant to the beggar-thy-neighbor currency policy, with the result being a move to parity against the U.S. dollar.

That trade is expected to continue if the Fed also takes the lead in decelerating.

"The relatively tighter US fiscal policy is now being complemented by prospects that the Fed eases off the monetary accelerator later this year, well before Europe or Japan," Brown Brothers Harriman said in a note.

—By CNBC's Jeff Cox. Follow him @JeffCoxCNBCcom on Twitter.

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