The battle of psychologies regarding the dollar continues in the currency market.

The dollar fell to an all-time low of $1.5979 versus the euro Wednesday, after an E.U. inflation report indicated accelerating inflation on the continent, reducing the likelihood of a European Central Bank interest rank cut at its next meeting.

Further, a below-consensus, March 2008 U.S. housing stats report and an in-line March 2008 U.S. inflation report also weighed on the dollar: each means that the U.S Federal Reserve will not feel inordinate pressure to pause in its interest-rate-reduction cycle to stimulate the anemic U.S. economy. That's dollar bearish, because, all other factors being equal, money tends to flow to higher-interest-rate currencies and away from lower-interest currencies.

The dollar also fell about 1 cent versus the British pound to $1.9704 and about two-tenths of a yen against Japan's yen to 101.57 yen.

Words on dollar not enough

The continuance of the dollar's slide Wednesday flies in the face of the expressed wishes of the G-7 economic powers at their recent summit. The G-7, which met last Friday, expressed support for the U.S. dollar. But apparently it did not take any substantive actions to support it, leading traders to default to the status quo -- economic fundamentals -- so said Andrew Resnick, independent currency trader.

Those fundamentals -- the U.S. trade deficit, budget deficit, slow-growth economy, among others -- argue that the already-weak dollar should continue to decline in 2008, he said. Barring an intervention by the G-7 the dollar should continue to decline at least through Q2 2008, Resnick said, adding that he has short dollar positions in the euro/U.S. dollar, British pound/U.S. Dollar, and Japanese yen / U.S. dollar currency pairings.

Conversely, dollar bulls argue that the dollar is oversold, and set to reverse. They say an end to the Fed's interest rate reduction cycle, the increasing attractiveness of U.S. investments as it nears the bottom of its recession in Q2 2008, and the European Central Bank's and the Bank of England's need to cut interest rates themselves to stimulate growth, will lead to money flows into the dollar, sparking a dollar rally.

Resnick doesn't buy the dollar bulls' thesis, arguing instead that so long as a currency's decline is orderly, "fundamentals rule the day" -- and those data points suggest further dollar declines are ahead. He said he will consider becoming a dollar bull when the U.S. federal budget and trade deficits start to decline and after the U.S. economy starts to grow again. That day is not today, he said.