When a foreign currency, such as Mexico's peso, declines rapidly in value, it makes it harder for that country to pay back loans from Western banks, which could lead to more corporate defaults, or possibly government defaults.

Mexico's peso, once about 10 pesos to the dollar this summer, has weakened to 12.9 pesos to the dollar. So far, Mexico officials have been able to slow the peso's drop: the Banco de Mexico has bought $13.1 billion worth of pesos since October 8.

Meanwhile, in Ukraine, the Kiev-based central bank will accept a $16.5 billion loan from the International Monetary Fund, subject to the approval of Ukraine's parliament, to help support the nation's financial system. Institutional investors are concerned about the threats to Ukrainian banks posed by the credit crunch.

Also, Brazil's central bank has intervened in the currency market several times this month to check the slide of its currency, the real, which has weakened to 2.46 reals versus the dollar, from 1.46 in August.

On Wednesday, the U.S. Federal Reserve took additional actions to simultaneously meet developing countries' needs for more dollars and support their local currencies by establishing $30 billion temporary swap lines with Brazil, Mexico, South Korea, and Singapore.

Economist David H. Wang said the move by institutional investors to the dollar is "a statement of confidence in the American system of government" -- one that's occurring, paradoxically, at a time when the U.S.'s economic fundamentals are at their weakest levels in decades.

"I think what's coming into play here is the United States' history of its respect for the rule of law and the nation's Bill of Rights, including the protection of capital, and, to a certain degree, the inherent fairness of the American people," Wang said. "Institutional investors and others believe that at the end of the day, they will get a fair shake in the American system ... receive fair treatment, certainly faring no worse than the treatment they would receive in other countries."

The fiscal / economic consequence of investors' flocking to the dollar? It will enable the United States to finance its bank rescue and economic recovery spending at interest rates dramatically lower than what they would be, had institutional investors fled the dollar, Wang said. "I can't think of any other modern nation that had this advantage when a financial crisis hit their nation," Wang said. "In some sense, it is remarkable."

Economic Analysis: Regarding foreign institutional investor confidence in the dollar, the view from here argues there will be no second chances for United States. As economist Wang noted, the nation has an opportunity to fix its structural problems at relatively low -- not high -- interest rates. Those fixes include balancing its federal budget, an energy policy to cut the trade deficit, massive rebuilding of its infrastructure, incentives to redevelop its industrial base, incentives to help Americans save more, health care reform, and of course, beefed-up financial services / banking regulations.