The dollar bulls, in general, argue that the issue regarding whether the U.S.'s pronounced recession has bottomed has not been resolved, and that fact, combined with lingering concern about bank system health, will cause caution to prevail among institutional investors. If that mindset prevails, the dollar's value will stabilize, as investors seek safety, and buy U.S. Treasuries. In other words, the dollar bulls believe 'risk aversion' will prevail in the currency markets.

Conversely, the dollar bears, in general, argue that the bulls have it all wrong: the bears say that both the U.S. and global economies are on a growth track, and that comments by U.S. Federal Reserve Chairman Ben Bernanke this week that the the recession is "very likely" over, supports their view. Hence, the dollar bears say 'risk appetite' -- not 'risk aversion' -- is the dominant investment outlook, and this will lead to a flow of capital out of U.S. Treasuries, and into riskier, higher-return investments, particularly those where GDP growth is likely to be at least adequate, such as selected economies in Asia.

Dollar's moves: two-edged sword

And, as is the case with the dollar, a dollar move in either direction is a two-edge sword. Most governments want a strong currency, and Obama administration officials certainly want a strong dollar, as it generally means your economy is strong and/or growing. But as the dollar strengthens, it makes the costs of U.S. exports more expensive, which is why U.S. companies will voice concern if the dollar gets too strong.

Conversely, most governments (except China) don't want a weak currency, as, it can discourage foreign investors for deploying capital in your country, and it can also be inflationary. However, a weaker currency does make a home country's exports less expensive to foreign consumers; and in the case of the weak dollar, it has helped boost U.S. exports.

Another factor working to support the dollar? The recession in Europe. The United States' budget deficit has ballooned to fund the bank bailout and fiscal stimulus package, and historically, that would send a currency plunging. That has not occurred (so far), in good part due to the fact that the economies of the United Kingdom and the euro-zone also suffered mortgage-related bond losses, and fell into recessions, as well, decreasing the attractiveness of the euro and British pound. As a result, in 2009 the dollar has weakened only about 6% versus the euro and 7% versus pound, despite trillion-dollar-level U.S. budget deficits.

Dollar Analysis: Can the dollar continue to hang-in-there? Any lower-than-expected monthly U.S. budget deficits would surely support the dollar, but given increased demand for capital outside the U.S. as the global economy recovers, the argument is tipped in favor of a further decline in the dollar in Q3/Q4. Also, leaders at next week's G-20 meeting in Pittsburgh are unlikely to issue a special statement relating to currencies, other than to continue to encourage the U.S. to decrease its budget deficit and trade deficit.