The beleaguered U.S. dollar, which has weakened about 50% versus the euro and about 11% versus the British pound since 2002, is down but hardly out.

The dollar has rallied in the past two months versus the euro (up 8%) and pound (up about 4%), on renewed concern about sovereign debt in Europe. This time, the concern is about Portugal's debt, and the impact continued credit market woes would have on both euro-zone and United Kingdom GDP growth.

On Tuesday, Portugal's Prime Minister Jose Socrates said his country will not need a bail-out, and its budget deficit will be lower than forecast, Bloomberg News reported. He said rumors that the country needs aid are helping "speculators" while hurting Portugal and driving down the euro.

First, the euro came under pressure as a result of Greece's fiscal crisis. Now, it seems the British pound may plunge too.

The pound weakened another half-cent versus the dollar to $1.4950 on Tuesday at midday, and the consensus is that the pound will continue to fall versus the world's other, major currencies.

What's hurting the pound? Short-term, investors are concerned that Britain's ruling Labor Party may remain in power -- but without a clear majority -- after the opposition Conservative Party's lead narrowed in a weekend public opinion poll, Reuters reported Tuesday.

Trillion dollar deficits extending out, purportedly for a decade. A projected $1.6 trillion deficit for next year, fiscal 2011. A higher U.S. national debt ceiling.

And what's the U.S. dollar doing amid the above? Oh, it's trending higher against the world's major currencies.

The dollar early Friday strengthened more than 1 cent versus the euro and British pound, to $1.3607 and $1.5612, respectively, capping a week of impressive gains for the buck.

The March British pound futures traded at $1.5928 on Thursday. BNP Paribas, an international commodities trading firm, predicts that the pound will fall to $1.5730 in the coming weeks and then to $1.40.

Analyst Ian Stannard, said that the pound could "fall off the cliff." Some high-profile bond investors, including Bill Gross's Pimco investments, are pulling back from the purchase of Gilts (British bonds). Some investors are even pulling out completely.

Lloyd's of London is poised to take some risks in 2010. In fact, it's ready to put more than $36 billion into the insurance and reinsurance world, according to analysts at reinsurance intermediary Guy Carpenter, a division of Marsh & McLennan (MMC).

The year-over-year increase could be as high as 27% compared to 2009, with the additional capacity coming from lower risk-transfer rates for some lines of business, though much of it is being offered to compensate for the weakness of the British pound relative to stronger currencies, such as the U.S. dollar.

U.S. Federal Reserve Chairman Ben Bernanke did something Monday that Fed chairs rarely do: he commented on the dollar.

Comments about the dollar are almost exclusively left to the U.S. Secretary of the Treasury, but on Monday Bernanke, in a speech before the Economic Club of New York, said the large movement of capital precipitated by the financial crisis "resulted in a marked increase in the dollar," and those flows are now returning to their former status, due to improved credit market conditions and the stabilization of global economic activity.

A word to the wise: Investors should ignore and/or avoid those in the popular press who rush forward with pronouncements about the dollar vis-à-vis the world's other, major currencies.

Sometimes you'll see them on the 24-hour cable news channels at night on FoxNews (NWS), CNN (TWX), and MSNBC (GE). Their research is often simplistic at best, and at times, it's outright wrong.

One common, conventional wisdom articulation concerns the dollar, and it's 'imminent collapse.' Nothing could be further from the truth. But that's the type of flippant conclusion one gets when one uses superficial analysis, as in 'U.S. budget deficit up, U.S. dollar down.'

Investors have probably heard Obama administration officials, like previous Bush administration officials –- and just about every other administration since 1981 -- rattle off the mantra, 'The United States is committed to a strong dollar' even as the dollar continues to weaken. What's going on here?

Well, first: the currency market, long-term, emphasizes actions, not words, and current U.S. public policies do not support the dollar. To strengthen it, the U.S. must cut its trade deficit, eliminate the budget deficit, and get the U.S. economy growing at an adequate rate again.

Is a 'super-currency' – one that could for all intents and purpose replace the dollar as the world's reserve currency – possible?

Well, it is possible, but in this case the aforementioned switch would certainly be super, as it would represent a gargantuan task and adjustment period for members of the global financial system.

What's next for the dollar? Good question. It depends on which set of economic data points you emphasize, or which mindset/narrative you believe is dominant in the currency markets.

After a nearly two-week decline against the world's other, major currencies, the dollar see-sawed with the euro for the upper hand Friday, as dollar bulls and dollar bears each tried to make their case that their view was more supported by current conditions. The dollar strengthened one-half cent versus the euro to $1.4696 and about 1.8 cents versus the British pound to $1.6260 on Friday at mid-day.

Where's the dollar headed from here? Well, if you're in the camp that argues both monetary and fiscal stimulus guarantee rising inflation, the dollar will trend lower in the immediate quarters ahead, and probably for longer.

If you're in the camp that argues that given asset destruction, and massive job lay-offs, pricing power is non-existent, the dollar will hold its own against the world's other major currencies.

The British pound (CME: $BPY) hit $1.60 for the first time in more than half a year this morning, thanks to improved service company sentiment and an increase in mortgage approvals. A rise in consumer confidence in the United States increased risk appetite and lifted the pound, as well.

The news was good enough for a 0.5% gain for the pound against the dollar, a 0.6% increase relative to the euro and 1% against the yen (CME: /JY\M09).

One of our global partners, Britain, is in an economic tsunami. Here are some recent indicators of the damage being done to Britain's economy:

• The annual rate of decline in industrial output has reached an alarming 12%.
• Manufacturing output fell by 6.4% in three month to January, faster than the 4.9% contraction in the quarter ended in December.
• During the last few months, GDP shrunk by 1.5%. The trends are pointing to a 4% decline in 2009. The last time Britain saw such a sharp decline was in 1931, with a fall of 5%.

iShares Barclays Capital Long Term Tr ETF (NYSE: TIP) closed at $102.35. TIP April call option implied volatility is at 10, puts are at 8; below its 6-month average of 13, according to Track Data, suggesting decreasing price risk.

PowerShares DB US Dollar Index Down (NYSE: UDN) is a rules-based index composed solely of short USDX® futures contracts. The USDX® futures contract is designed to replicate the performance of being short the U.S. Dollar against the following currencies: Euro, Japanese Yen, British Pound, Canadian Dollar, Swedish Krona and Swiss Franc. UDN closed at $25.52. UDN May option implied volatility of 20 is below its 26-week average of 25, according to Track Data, suggesting decreasing price movement.

PowerShares DB US Dollar Index Up (NYSE: UUP) is a rules-based index composed solely of long USDX® futures contracts. The USDX® futures contract is designed to replicate the performance of being long the U.S. Dollar against the following currencies: Euro, Japanese Yen, British Pound, Canadian Dollar, Swedish Krona and Swiss Franc. UUP closed at $25.31. UUP May call option implied volatility is at 17, puts are at 21; below its 26-week average of 22, according to Track Data, suggesting decreasing price movement.

Option Update is provided by Stock Specialist Paul Foster of theflyonthewall.com.

U.S. stock markets appear to be in free-fall (at least short-term), the federal budget deficit will exceed $1 trillion for at least the next two years, and Congress will likely have to raise the national debt ceiling above $13 trillion -- all negative developments for the dollar.

So what does the greenback do Monday? Of course, it continues to rise -- strengthening about one-half cent versus the euro and more than 2 cents versus the British pound, to $1.2581 and $1.4034, respectively.