here’s a lot of expectation surrounding the International Monetary Fund and World Bank meeting this weekend in Washington. The currency war sparked by global efforts to recover from the Great Recession and its repercussions should be the main discussion as governments around the globe increasingly try to use exchange rates as a domestic boost to growth.

On Monday a direct warning was sent by Charles Dallara, Institute of International Finance managing director, that the world’s leading economies must come to some sort of agreement on a currency pact or face more counter-productive protectionism. He called for a more sophisticated version of the 1985 Plaza Accord to compliment an exchange rate understanding.

Tuesday, shortly before the Bank of Japan surprised the world (although we shouldn’t have been surprised) with an interest rate cut to a range of 0.00% to 0.10% from 0.10% and threw quantitative easing on the table, the IMF sent a similar message about using exchange rates to solve domestic problems. Dominique Strauss-Kahn, head of the IMF, warned that, “translated into action such an idea would represent a very serious risk to global recovery…Any such approach would have a negative and very damaging longer-run impact.”

The dual warnings encapsulate what should be the topic of foremost concern this weekend as officials from economies around the world convene to discuss measures to be taken to help the climb out of a troubled global economic state.

Yesterday, equity markets displayed their raw sensitivity to data and events leading up to the November 3^rd Fed meeting by cheering at the BoJ’s move and then at a better than expected ISM Non-Manufacturing number (53.2 versus expected 52.0). More than just a bright spot, the ISM number had some fortunate timing and proved a theory about the dollar. Good US data leads to optimism and equity bids, putting pressure on the dollar as it equates to the risk trade, or dollar carry while the obvious bad US data puts pressure on the dollar because it raises expectations of further quantitative easing. The BoJ’s announcement of its “comprehensive monetary easing” policy was intended to put pressure on the Yen but at the same time raised expectations of further US QE and sent the dollar south. This was then compounded by the ISM release.

Expectations were also helped by some Q&A in the WSJ with Chicago Fed President Evans who said, "We need more accommodation. A lot of people respond that their take on monetary policy depends on the data coming in from here on out. For me, the data have spoken very clearly. As I stared at the forecast even before the August FOMC meeting, I had come to the conclusion that things were very different than what I had been expecting in previous meetings. This is a far grimmer forecast than we ought to have. So yes, I'm in favor of more accommodation."

But there’s still a lot of questions surrounding the seemingly imminent policy change here and what a point Philly Fed President Plosser makes in his opposition to QE2. The Fed has faced much criticism for sending the wrong message. In an interview with the Financial Times he said, “I think that before we can engage [in further QE] we need to be very clear about what it is we’re trying to do, how we’re going to go about doing it, how we’re going to measure whether we’re effective at it or not, and how we’re going to communicate that.” I think the latter is the most important. Along with Evans, George Soros happens to disagree. I wonder what trade he’s got on that favors further QE.

Plosser voices concern over further easing By Robin Harding in Washington Published: October 4 2010 06:17 | Last updated: October 4 2010 06:17 http://www.ft.com/cms/s/0/1087d124-cf5d-11df-9be2-00144feab49a.html

America needs stimulus not virtue By George Soros Published: October 4 2010 21:52 | Last updated: October 4 2010 21:52 http://www.ft.com/cms/s/0/61a77634-cfeb-11df-bb9e-00144feab49a.html

This morning’s ADP private sector employment numbers disappointed the tape by clocking -39K versus an expected build of 18K but even though it gave equities a breather it was in line with most expectations for the private payroll forecast within Friday’s Non-Farm report as ADP tends to miss by around 76K. Tomorrow we get the Monster Employment index, Weekly Jobless, and Treasury issuance announcements. Then at 1:30 Hoenig speaks. I’m looking forward to hearing what the lone dissenter has to say. He kind of has Plosser on his side now.

At this point it doesn’t seem like Friday’s employment data, or any sort of agreement discussed at the IMF meeting are going to influence whether or not we will see more QE but I’m curious to see if expectations change. The question is as much how much and when as it is what message is sent. Now with the currency war acknowledged, while we have been demonizing everyone else for intentionally devaluing their currencies, we have to make sure we don’t come across as hypocritical, lest our message with more QE look like a tired effort to say “In your face, Yen and Renminbi!” Then we can surely expect China to pull the trigger and start diluting our treasury prices with their holdings, pushing yields the Fed has worked so hard to push down back up. Sure enough, there are headlines just out about Wen warning that forced revaluation of the renminbi could be disaster for the world. Get ready for more of them fightin’ words.