Since August, Federal Reserve policy has further weakened the dollar. That's because the Fed has decided that it will try to help dampen the economic slowdown by cutting interest rates in the face of very high inflation. This policy is being pursued for two reasons:

• Ben Bernanke is an expert on the Great Depression and he believes that the cause was a lack of liquidity. He's now using the opposite approach to what was done back then; and
  
• The president does not want to sponsor a bailout of the mortgage industry.

The result of the Fed's decision not to keep inflation in check is further weakening of the dollar.

What does the future hold?

Between now and January 2009, the dollar will continue to weaken since there will be no change in policy. After that, the answer depends on who is president. If the winner is a Republican, odds are that the current policies will persist – due in part to the need to preserve the budget busting tax cuts and the desire to keep the wars going. Otherwise, there is some chance that the next president will revert to strong dollar policies.

How are emerging markets like Brazil, China and India affecting the current situation?

However, emerging markets will affect the situation. If they continue to be big consumers of commodities, their prices will rise and the inflation spiral will affect lower- and middle-income consumers around the world. As long as the U.S. keeps interest rates low, the combined effect of emerging market demand and low interest rates will cause inflation to accelerate. And the higher the inflation rate, the more value the dollar will lose.

Peter Cohan is president of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter.