Newton first theorized that for every action there is a reaction.

And there's perhaps no better example of that than the United States' current monetary policy.

In an effort to stimulate economic growth in the aftermath of the housing sector slump and ensuing credit crunch, the U.S. Federal Reserve has lowered benchmark interest rates from 5.25% in September 2007 to the current 3%. The policy, most economists and Wall Street analysts agree, represents the right action: it will take both monetary and fiscal policy to right the U.S. economic ship-of-state.

Action, and reaction

But, as Newton tells us, that does not mean that the Fed's actions have not had reactive consequences: they have, the primary one being the further decline in the dollar's value versus the world's major currencies. That's because, all other factors being equal, money flows toward higher-interest-rate currencies and away from lower-interest-rate currencies.

Right now, the Europe's and Britain's benchmark interest rates are higher than the U.S.'s and after the ECB and Bank of England maintained that spread when they kept rates the same Thursday, the dollar fell anew. The dollar plunged another 1.2 cents against the euro to $1.5361 and about 1.5 cents against the British pound to $2.0021. The dollar also fell about 1 yen against Japan's yen to 102.85 yen.

And there are other consequences. The dollar's decline will also increase inflation, if foreign exporters increase the price of their goods to the U.S. to maintain the real value of their export revenue, if U.S. consumers do not switch to domestic goods. The dollar's slide will also reduce the attractiveness of U.S. assets to foreign investors: if a currency depreciates 5-10% in a year, that's like telling foreign investors they'll automatically lose 5-10% from day one, before any commercial activity takes place. For foreign investors, that's about as appealing as a New York Yankee baseball cap is in Fenway Park.

Further, oil analysts say the dollar's decline is also a factor in oil's recent surge over $105 per barrel. Institutional investors, trying to hedge against inflation, are buying oil futures, and other commodities.

The Fed's dilemma

The Fed doesn't want to increase inflation or to erode the attractiveness of U.S. investments, and it certainly doesn't want the price of oil to rise, but right now, it has no other choice, says independent currency trader Andrew Resnick, who sees the dollar falling to $1.65 versus the euro and to $2.05 versus the British pound by the end of 2008. (Resnick presently holds dollar-short positions in the euro-U.S. dollar and British pound-U.S. dollar pairings.)

What would end the dollar's slide? Many economists and analysts say it will take increased U.S. savings, lower U.S. consumption of foreign goods (including oil), and the elimination of the federal budget deficit. And yes, the resumption of strong U.S. economic growth, but as noted, the Fed is working on that.