The buck doesn't stop here; it just keeps falling

The Fed must do a balancing act between keeping the domestic economy from going into recession and keeping inflation at bay.

Furthermore, no Fed likes to raise rates aggressively in a presidential election year. It seems more inclined to hold interest rates low for now to give financial markets time to recover from the housing meltdown and credit crunch. It did just that in its meeting on June 25, leaving a key short-term rate at 2 percent. The rate reached that level in April after a series of aggressive cuts that brought it down 3.25 percentage points since September. Those cuts helped ease the housing and credit crises--but drove the dollar further down.

In early June, Bush declared before his trip to Europe: "A strong dollar is in our nation's interests. It is in the interests of the global economy." That, plus a warning by Fed Chairman Ben Bernanke that the dollar's weakness was contributing to U.S. inflation, seemed to temporarily break the dollar's tumble. Presidents and Fed chairmen don't usually talk directly about the dollar and exchange rates--leaving that up to the Treasury secretary--and international bankers and investors took note of the high-level attention.

Over the past few weeks, the dollar has remained relatively stable, although it took a dip after the Fed decided to leave rates unchanged. The long slide may not be over.

Still, if the Fed moves to lift rates later this year, as some traders and investors anticipate, it could buttress the dollar and spur an exodus of speculators from the oil market--helping to both prop up the dollar and drive down oil prices. But few economists are sanguine that the economy will improve any time soon.

The other main tool to move the dollar--intervention in currency markets by buying dollars and selling other currencies--is risky.

It would take great sums of money to make any difference. The foreign exchange market is the largest in the world, with over $1 trillion traded each day. Seeing the U.S. trying to prop up the greenback by buying dollars could be taken as a sign of desperation and possibly trigger a renewed round of selling.

Furthermore, there has been little encouragement for such a strategy from finance ministers from the Group of Eight wealthy democracies--Japan, Britain, Germany, France, Italy, Canada and Russia plus the U.S.

Leaders of the eight countries were to meet in Japan beginning Monday, but the falling dollar was not even on the formal agenda. It's too touchy an issue, and the dollar's relative stability over the past few weeks makes it easier for world leaders to steer clear. "People will be talking about it in the corridors," said Reginald Dale, a senior fellow with the Center for Strategic and International Studies.

Treasury Secretary Henry Paulson has suggested that nothing is "off the table" including intervention. But Bush has made statements suggesting he intends to let market forces set exchange rates.