Here's an icebreaker for your next cocktail party or dinner party. (This one is sure to impress your friends and colleagues even more than explaining the market and economic significance of credit default swaps.)

Q: What's the strongest currency in the world?

Well, let's evaluate the world's major currencies and hone in on the answer.

• The dollar -- For the last few decades, the dollar was the world's strongest currency. After all, it is the world's reserve currency. However, recent history has not been too kind to the dollar -- the dollar's value has declined throughout the decade -- and the near-term outlook does not look good, either. Massive government spending to both end the financial crisis and put the U.S. economy on a sustainable growth track means additional inflation, if not dollar devaluation, is likely. Nix the dollar as the world's strongest currency.
  

• The British pound -- At one point in history, the sun never set on the British Empire, and the pound was the world's reserve currency. Although the pound has been strong this decade, likely additional interest rate cuts and fiscal stimulus to jump start the economy of Her Majesty's Kingdom, as John Lennon would refer to his native land, means the pound is likely to lose value in the year ahead. Nix the pound as the world's strongest currency.
  

• The euro -- The euro has challenged the dollar for reserve currency status this decade, and has gained versus the buck for most of that time, but you guessed it: the heavy hand of the financial crisis is beginning to take a toll. For example, Germany alone has approved a 650 billion euro (or $500 billion) bank rescue plan. That's equivalent to the U.S. putting in place a $2.5 trillion plan. Wow. Let's hope Germany doesn't have to use most of it. Of course, the euro zone is more than Germany, but severe stagnation in Germany suggests several more interest rate cuts by the European Central Bank. Nix the euro as the world's strongest currency.

Now one would think that the dollar, viewed as the source of much of the world's commodity price inflation this decade, rising from long-term lows would be a cause for celebration.

Not exactly.

While the dollar's rally against most of the world's other major currencies does mean commodity price pressures are likely to continue to subside -- and that's good news for inflation, economists say -- the dollar is nevertheless rising for the wrong reason. Namely, an economic slowdown in Europe.

Euro, pound plunge on recession concerns

"It's not so much as the dollar is strengthening but that the euro and pound are weakening on the likelihood that central banks in Europe will have to cut interest rates more to deal with a recession," economist Peter Dawson said. "Europe is also seen as later in the business cycle than the U.S., which means the U.S. economy is likely to recover sooner, which also helps the dollar. "

Cautious optimism. A step forward. A ray of light.

That was the stance currency traders took earlier Friday toward the U.S. Treasury's and U.S. Federal Reserve's plan, The New York Times reported, to move distressed/bad assets from the balance sheets of American financial institutions into a new government institution in order to check a U.S. credit crunch that by most all accounts was expanding into a global financial crisis.

"It's likely to mean higher inflation and certainly higher taxes in the United States and a further decline in the dollar, at least over the next six months, so the plan has its risks. But considering the freeze that was likely to grip the capital markets it's probably the best of a poor choice set," currency trader Andrew Resnick said.

Dollars rises on proposed government initiative

The dollar rose sharply across the board on word of the U.S. Government plan, which has the tentative consent of the U.S. Congress, following a special meeting Thursday night on Capitol Hill; Congress is expected to debate legislation for the program next week, Bloomberg News reported Friday. The dollar rose about 1 cent to $1.4213 and $1.8060 versus the euro and British pound, respectively, and about 2 yen to 107.50 versus Japan's yen.

Resnick said that in addition to the removal, over time, of distressed/bad debt -- much of it mortgage-related -- the Treasury's/Fed's plan to use $50 billion from the U.S. Government's Exchange Stabilization Fund to insure money market funds for a year is maintaining liquidity in credit markets and "will reduce the fear that's sort of come to take on a life of its own."

"First we had the attack on Lehman [Brothers], which many people feel could have survived if people continued to do business with them. Then there was the massive decline in the shares of Goldman Sachs and Morgan Stanley, two solid firms. When it started to spread to money market funds, with people pulling their money out on rumors and innuendo, everybody on the trading desks said, 'This is absurd and totally irrational. Something has to be done to stop this [expletive] nonsense,' " Resnick said. "Well, the federal government did something."

A flight to the dollar? Amid the United States' worst financial crisis in more than 20 years, perhaps since The Great Depression of the 1930s? It seems almost paradoxical, but that's the reality. So far. Stay tuned, an economist says.

The dollar has lost ground versus the world's other major currencies, amid this latest round of write-offs, bankruptcies and mortgage-asset-related stress on Wall Street, but the greenback has not plunged. In fact, the dollar is off its lows registered early Monday.

In early Tuesday trading, the dollar rose about a half-cent versus the euro to $1.4198, 1.5 cents versus the British pound to $1.7854, and a half-cent versus the Swiss franc to $1.1101. However, the dollar fell about 1 yen to 103.68 versus Japan's yen.

Themes: flight to quality, de-leveraging

Economist David H. Wang told BloggingStocks Tuesday the dollar's recent track displays two tendencies: a flight to quality and an unwinding of the carry trade -- i.e. a global de-leveraging.

"Although the U.S. Government and taxpayers are likely to spend more to deal with this financial crisis, and that implies more dollars in supply and inflation, institutional investors fear a decline or collapse in stock markets around the world, and are piling into the dollar," Wang said. "That is offsetting the dollar-weakening-effect of more U.S. Government spending. Essentially, it is flight to quality, so far."

The dollar Monday recovered from lows registered earlier in the session, but traders said uncertainty permeated the currency market, given the unprecedented developments in the global financial system.

"We're in unchartered waters, and no one is certain about the impact on the dollar or the financial system," currency trader Andrew Resnick told BloggingStocks earlier Monday. "The logical, rational view is that the dollar will fall based on the expectation of increased government spending and borrowing to deal with the widening financial crisis. But a major dollar fall may not occur if the markets judge the worst is over. That's why a lot of traders are flat now." Resnick added that he was flat, or had no open currency trading positions.

The dollar initially fell early Monday morning about 1.5-2% against the euro, British pound, yen and Swiss franc, but recovered somewhat after the European Central Bank and the Bank of England joined the U.S. Federal Reserve in taking action to calm the financial markets jolted by Lehman Brothers (NYSE: LEH) bankruptcy filing, Bloomberg News reported Monday.

ECB, BOE, Fed all add liquidity to system

The ECB awarded banks a one-day, money market auction of $30 billion that was three times oversubscribed, while the BOE loaned banks $9 billion for three days. Earlier, the Fed expanded the collateral it will accept for loans to securities firms.

The U.S. Government 'adds' $5 trillion in debt, but the dollar doesn't fall. How is this possible?

"Because the currency markets months ago had already factored-in or priced into the dollar some form of U.S. Government takeover of both Fannie Mae and Freddie Mac," Andrew Resnick, currency trader, told BloggingStocks Monday.

The U.S. Treasury will buy as much as $200 billion in new, senior, preferred stock in Fannie (NYSE: FNM) and Freddie (NYSE: FRE) as part of its takeover of the government service giants, whose business models ran into trouble as the housing boom ended and mortgage defaults soared. The large, potential increase in government spending/borrowing would appear to be unquestionably dollar-bearish. Not so, says Resnick.

"The bailout is going to cost the U.S. Government and taxpayers more money, there's no doubt about that. But if it represents the first step toward reaching a bottom in the housing mess and at the same time stabilizes credit markets, that would be dollar bullish," Resnick said. "And that's the currency market's view at the present time."

Indeed, the dollar showed little signs of a collapse Monday. After dipping early Monday morning in Asia, the dollar firmed and was up about one-half cent to $1.4430 versus the euro, and added three-tenths of a cent versus the British pound. The dollar was rose about 1 yen to 108.52 versus Japan's yen and rose 1 cent to $1.1290 versus the Swiss Franc.

The dollar Friday was on course to record its fifth consecutive weekly gain, propelled higher by the prospect that economies in Europe may be later in the recession/expansion economic cycle than the United States.

The above suggests the Bank of England and the European Central Bank will have to cut interest rates -- itself a bullish factor for the dollar -- with the U.S. economy recovering sooner than the economies in the United Kingdom and euro-zone -- another dollar-bullish circumstance.

On Friday, the dollar strengthened 1.5 cents to $1.4675 versus the euro, and about seven-tenths of a cent to $1.8632 versus the British pound. The dollar also rose about 1 yen to 110.61 versus Japan's yen and about one-half cent to $1.0988 versus the Swiss franc.

From dollar-bear to dollar-skeptic

Currency Trader Andrew Resnick said he's not a dollar bull yet, but the changing global economic landscape has moved him from the dollar-bear category to "the dollar-skeptic category."

"Clearly, fundamentals are shifting in favor of the dollar. Global growth is slowing, taking pressure off commodity prices. Export gains are lowering the U.S. trade deficit, and there's now a better than 60% chance Europe [including the U.K.] will have to cut interest rates," Resnick said. "Those are the best fundamentals for the dollar in about three years." Resnick added that he's presently flat, or had no open currency trading positions.

The dollar Friday was poised to record its largest weekly gain versus the euro in three years, on a growing consensus that the U.S. Federal Reserve will increase interest rates soon to check rising U.S. inflation.

The dollar traded up about one-half cent to $1.5372 versus the euro early Friday afternoon - - a level that if sustained at the New York close at 5 p.m. EDT would give the greenback its biggest weekly gain since early 2005, Bloomberg News reported Friday.

The dollar also rose Friday against the other major currencies. The dollar increased about one-half cent to $1.9494 versus the British pound, and about sixth-tenths of a cent to $1.0476 versus the Swiss franc. The dollar was unchanged versus Japan's yen at 107.90 yen.

The dollar bulls have been vanquished again.

For the fourth time since the Economic Stimulus Act of 2008 was passed in February 2008, a nascent dollar rally has failed.

In Friday afternoon trading, the dollar was poised to record a 3-cent decline versus the euro for the week, to about $1.5776. The dollar has also fallen about 3 cents versus the British pound to $1.9788, and about 1.2 yen to 103.28 versus Japan's yen.

The kindling for a rally certainly existed earlier in the week: the prospect of 'the beginning of the end' of the worst of the U.S. housing market's troubles, and an interest rate decrease by both the Bank of England and the European Central Bank had emboldened dollar bulls.

The dollar rallied to a six-week high Wednesday after U.S. productivity increased at a larger-than-expected rate and sentiment surfaced that Europe's economy may have slowed considerably.

The dollar rose about 2 cents versus the euro -- a large move in the currency market -- to $1.5370 on Wednesday afternoon. The dollar also gained against the world's other major currencies, rising about 2 cents to $1.9530 versus the British poundת about 0.5 cents to $1.0555 versus the Swiss franc and about one-half yen to 104.85 yen versus Japan's yen.

U.S. productivity gives dollar a lift

Earlier in the day, the U.S. Labor Department announced that U.S. worker productivity increased at a 2.2% annual pace in Q1 2008, well above the 1.7% Bloomberg News survey consensus estimate.

Independent currency trader Andrew Resnick told BloggingStocks Wednesday the Q1 2008 productivity data, combined with a sense that the European Central Bank is behind-the-curve concerning interest rate cuts to deal with slowing economic growth, put traders in dollar-buy mode.

The dollar rallied to a 5-week high Thursday on the belief the U.S. Federal Reserve will at least pause in its interest rate cutting cycle, as it evaluates the impact of both monetary and fiscal policy stimulus on the sluggish U.S. economy.

The dollar rose more than 2 cents versus the euro -- a large move in the currency market -- to $1.5440 on Thursday at mid-day. The dollar also gained against the world's other major currencies, rising about 2 cents to $1.9730 versus the British pound, about 1.7 cents to $1.0510 versus the Swiss franc, and about 1 yen to 104.50 yen versus Japan's yen.

Dollar rally 'may have legs'

Further, unlike previous fits-and-starts regarding earlier dollar moves higher, independent currency trader Andrew Resnick told BloggingStocks Thursday this dollar rally "may have legs" due to a potential change in fundamentals, in the dollar's favor.

The euro hit an all-time of $1.5915 versus the dollar Thursday, only to become subject to an increasingly rare event in currency markets these days - - a dollar rally.

That's right: you read correctly. The dollar rallied, getting off the deck, as it were, from its record-low versus the euro to gain more than 1 cent for the day to trade at $1.5741 late Thursday.

Trading is likely to be calm to inert heading into Friday, due to the G-7 meeting in Washington of the world's major central bankers and finance ministers.

What inspired the dollar's rally? Independent currency trader Andrew Resnick told BloggingStocks the currency markets interpreted Thursday's lower-than-expected 357,000 U.S. initial weekly unemployment claims as a strong point for the ailing U.S. economy. That fact, combined with the belief that the previous week's claims may have been inflated, due to the earlier Easter holiday, sent traders into buy-dollar mode.

The dollar's modest rally faded Tuesday afternoon as traders calculated that the U.S. Federal Reserve is likely to continue to cut key, short-term interest rates by another 50 basis points to jump-start the anemic U.S. economy.

In mid-day Tuesday trading, the dollar was substantially lower against the world's other major currencies. The dollar fell almost 2 cents to $1.5596 versus the euro, about one-half yen to 100.22 versus Japan's yen, and about 1.5 cents to $2.0003 versus the British pound. The dollar also fell about 1 cent to $1.0095 versus the Swiss franc.

Short-lived dollar rally

Some traders had argued that the dollar would be able to post its second straight weekly rise on renewed confidence that the U.S. economy would perform better than expected, with a shallow recession, said Andrew Resnick, independent currency trader. But those comments most likely will be categorized as 'famous last words' based on recent U.S. housing data, which suggests continued U.S. economic sluggishness up ahead, he said.

Although confidence that market forces will be the only factors determining currency rates is decreasing, there's little indication the world's major central banks are about to initiate a coordinated action to support the dollar.

The dollar has fallen more than 20% versus the euro and more than 10% versus the British pound since 2006. In the months ahead, monetary officials may face increased pressure to intervene as companies in Europe complain about the higher prices they must charge for their exports to the U.S. to retain purchasing power amid a falling dollar.

"The risks of coordinated intervention are going to increase in the second quarter for sure as the dollar weakens further,'' Mitul Kotecha, head of foreign-exchange research in London at Calyon, told Bloomberg News Monday. The firm is the securities unit of Credit Agricole SA, France's second-biggest bank.

In midday Monday trading, the dollar was mostly higher against the world's other major currencies after U.S. stock markets rose. The dollar gained about one-half cent to $1.5356 versus the euro, about 1 yen to 100.55 versus Japan's yen, and about 1.5 cents to $1.0288 versus the Swiss franc. The dollar was virtually unchanged at $1.9822 versus the British pound.

The dollar fell to a yet another record-low against the euro Friday and plunged against the world's other major currencies, as investors shunned U.S. investments ahead of an almost-certain U.S. recession, with likely further interest rate reductions from the U.S. Federal Reserve.

Friday's trigger event for selling was The Bear Stearns Companies, Inc. (NYSE: BSC) stunning announcement that -- less than 10 days after senior management officials called liquidity-crunch rumors 'absolutely ridiculous' -- it had accepted a 28-day, emergency, secured loan from the U.S. Federal Reserve via JP Morgan Chase & Co. (NYSE: JPM).

The Fed said in a statement that it will ``continue to provide liquidity as necessary to promote the orderly functioning of the financial system,'' repeating reassurances Federal Reserve Chairman Ben Bernanke has made often since credit problems first surfaced in August 2007. The Fed did not state how large their loan is to Bear Stearns.