The dollar rose to its highest level in more than a week Monday morning on talk leaders at the G-8 summit in Japan will support the currency in an attempt to halt rising commodity prices.

The dollar strengthened about one-half cent versus the euro to $1.5629 and about 1 cent versus the British pound to $1.9659 in Monday morning trading. The dollar also rose about one-half yen to 107.66 versus Japan's yen.

Ian Stannard, a senior currency strategist at BNP Paribas SA (NASDAQ: BNPQY), France's largest bank, told Bloomberg News Monday that support for the dollar in the form of verbal invention continues, driven by the thesis that a stronger dollar, globally, is in everyone's interest.

Many economists agree that a falling and weak dollar has been a factor in rising commodity prices. Oil and other commodities tend to rise when the dollar falls as investors / traders seek to preserve purchasing power of the decreased value of dollar-denominated commodities by bidding their price up. However, economists differ regarding the extent of the weak dollar's commodity-inflation impact, with some arguing it is only a mild factor.

'Actions speak louder than words'

Further, economist Peter Dawson told BloggingStocks Monday, dollar bulls should not feel too emboldened by a verbal stance by the G-8.

If an enemy sworn to the destruction of the global economy was given free reign, it would follow the strategies of its current leaders.

One key to destroying an economy is to break its pricing mechanism. What does an effectively functioning pricing system do? It creates a market of buyers and sellers who can meet, agree on a price, conduct the transaction, and create an information trail that permits future market participants to judge what might be a fair price for their transactions.

Another key to destroying an economy is to put too low a price on risky behavior. Why is it important to price risk accurately? Because if decision-makers do not assess the risk at the time of their decision, the economy will end up paying for the under-priced risk long after those decision-makers have left office.

So how have current leaders broken the pricing mechanism and under-priced risk? Here are three ways:

The dollar is on-pace to record a large weekly decline Friday -- undoing last week's gains against the euro and pound -- as traders and analysts debated the likely next step for the U.S. Federal Reserve and European Central Bank.

The dollar traded at about $1.5637 to the euro Friday at mid-day, which would represent a 3-cent decline for the week, if it maintains that level by the New York close at 5 p.m. The dollar also traded at $1.9760 to the British pound, also about a 3-cent loss for the week.

Currency trader Andrew Resnick told BloggingStocks Friday concerns about rising inflation in Germany and financial service losses in the United States have caused a sentiment adjustment in the often-volatile currency markets.

A shift in sentiment

"Last week, the debate was structured around rising inflation in the U.S. and how long the Federal Reserve could hold-off before raising interest rates. That was bullish for the dollar," Resnick said. "But this week we've seen a reversal. The talk now is about [European Central Bank President Jean-Claude] Trichet beating [Fed Chairman Ben] Bernanke to the punch on interest rates, and that put a lot of traders in euro-buy mode." Resnick added that he is presently flat, or has no open currency trading positions.

It's Uncle Ben versus the Ferocious Fundamentals.

The dollar rose more than 1.7 cents against two other major currencies Tuesday -- a large move in the currency market -- after U.S. Federal Reserve Chairman Ben Bernanke said the world's most important central bank will "strongly resist" any dip in public confidence in stable prices, Bloomberg News reported.

Traders interpreted Bernanke's comments as renewed Fed attention to oil-induced, rising U.S. inflation, and bought the dollar, sending it higher Tuesday at mid-day. The dollar strengthened 1.7 cents to $1.5477 versus the euro, 2.1 cents to $1.9540 versus the British pound, and almost 1 yen to 107.19 versus Japan's yen.

A 'dollar skeptic'

Further, although Chicago Board of Trade futures calculate a 55% chance of a Fed quarter-point interest rate increase in its benchmark rate when it meets next on August 5, currency trader Andrew Resnick remains a doubter.

The dollar plunged Friday after Morgan Stanley said oil prices could rise to $150 and after data indicated the U.S. employment rate surged to 5.5% in May.

The dollar fell one cent versus the euro to $1.5694 and about three-quarters of a cent versus the British pound to $1.9640. The dollar also declined about one half-yen to 105.55 versus Japan's yen.

A Morgan Stanley report ended what had been a mild dollar rebound over the past week. Morgan Stanley said oil prices could rise to $150 per barrel, due to Asia's likely accelerating purchase of Middle East oil exports, Bloomberg News reported Friday. Oil surged $6.54 to $134.54 per barrel in early trading Friday, on top of Thursday's large $5.49 gain.

Also Friday, the U.S. Labor Department announced that the nation's unemployment rate surged to 5.5% in May from 5.0% in April, as U.S. companies continued to cut expenses to protect profits in the face of the economic slowdown.

So much for the (latest) dollar rally

Currency trader Andrew Resnick told BloggingStocks Friday the oil/unemployment double-whammy would be tough for a strong currency to withstand, let alone the fragile dollar.

"We were experiencing a modest dollar rally, and there were signs of strengthening dollar-bullish sentiment. The Fed may raise interest rates and oil prices up until a few days ago were trending lower on the belief global oil demand will drop off. But the dollar-bulls have been defeated again," Resnick said. He added that he was presently flat after being stopped out of dollar long positions in the euro-dollar and British pound-dollar currency pairings.

Further, Resnick said the Thursday/Friday events underscores how hard it is for the market to sustain a dollar rally in the face of dollar fundamentals that have remained decidedly negative for more than four years.

"It's the old problem of the terrible twins, the U.S. trade deficit and the federal budget deficit," Resnick said. "People had talked up the ability of the dollar to gain support on [Fed Chairman] Bernanke's interest rate pause, but the fundamentals laid waste to that sentiment again," Resnick said. "Until the deficit numbers show steady improvement, and the [U.S.] economy starts to grow, it's hard to see the dollar sustaining a rally. The economy is simply too weak right now."

Reuters reports that Treasury Secretary Hank Paulson is in the middle of oil country -- Qatar -- talking about how a strong dollar is in the U.S. interest. With the dollar down 72% since January 2001, it would be nice if Paulson would use his power to strengthen the dollar.

Unfortunately, he doesn't have enough power or chooses not to use it. The power to influence the strength of the dollar resides in the Oval Office. With a $410 billion budget deficit, $9.4 trillion in government borrowing, and interest rates that have dropped from 5.25% to 2% since August, it's not a big surprise that the dollar is so weak.

And since oil is denominated in those ever-weaker dollars, the price of gasoline tops $4 a gallon -- a big "surprise" to the Oval Office occupant. Nevertheless, this is great news for Qatar and its neighboring countries. Our leaders are protecting the interests of those Middle Eastern countries -- both through military policies and economic ones -- while talking about a strong dollar.

Those countries have outsourced their military defense to the U.S. And the rest of us are paying the price.

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter.

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.

As economists and stock reviewers will vouch, analysis can vary depending one's prism, or perspective -- i.e. how one views the economic world.

Look at the 2008 U.S. economy one way, and you see the onset of a conventional recession. Five or so years of GDP growth, earnings growth, investment, resource / commodity / raw material utilization, and consumption have basically run their course, and a pause is due. It's a period of lower earnings, less investment, lower consumption, and we call these pauses recessions.

Look at the 2008 U.S. economy another way and you see a different picture. Five or so years of GDP growth, earnings growth, but also substantial asset price inflation - - primarily in residential real estate - - combined with only modest improvement in the U.S. trade deficit, federal budget deficit, national savings rate, and a substantial weakening of the U.S. dollar. Then, a period of slower growth ensues, a slowdown made all the more onerous by the appearance of a credit crunch that began when the real estate balloon began to deflate, if not burst.

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.

Newton first theorized that for every action there is a reaction.

And there's perhaps no better example of that than the United States' current monetary policy.

In an effort to stimulate economic growth in the aftermath of the housing sector slump and ensuing credit crunch, the U.S. Federal Reserve has lowered benchmark interest rates from 5.25% in September 2007 to the current 3%. The policy, most economists and Wall Street analysts agree, represents the right action: it will take both monetary and fiscal policy to right the U.S. economic ship-of-state.

Action, and reaction

But, as Newton tells us, that does not mean that the Fed's actions have not had reactive consequences: they have, the primary one being the further decline in the dollar's value versus the world's major currencies. That's because, all other factors being equal, money flows toward higher-interest-rate currencies and away from lower-interest-rate currencies.

The dollar fell against the world's major currencies Wednesday -- and to a record-low versus the euro -- as widening fears of a U.S. recession prompted investors and traders to exit dollar-denominated assets.

The dollar fell about 1.5 cents to $1.5145 versus the euro before gaining back some ground to $1.5125 Wednesday at mid-day, after a series of data points suggested the U.S. economy continues to slow, which will invariably prompt the U.S. Federal Reserve to lower interest rates further to stimulate growth.

The dollar also declined about one-cent to $1.9907 versus the British pound, and fell about 1 yen to 106.35 yen versus Japan's yen.

Independent currency trader Andrew Resnick, formerly of Next Capital of New York, told BloggingStocks Wednesday the factors that have led to a three-year decline in the dollar have accelerated in the past week.

"We have an oil price above $100 per barrel with investors piling into it as an inflation hedge. That hurts the dollar two ways. It takes money out of U.S. assets and by boosting oil's price, it increases the trade deficit, which is bearish for the dollar," Resnick said. "Also, the January durable goods order report was bearish, which means the Fed [U.S. Federal Reserve] will cut rates once, maybe twice more, which will lead investors to choose higher-interest-rate currencies."

What's the new president - - Republican or Democrat -- likely to face after taking the oath of office in 2009?

Daunting fiscal problems -- and right at a time when Congress may have to consider more fiscal stimulus to jump-start the U.S. economy, one economist observed.

The biggest problem, economist Glen Langan said, will be the federal government's budget deficit. The United States is on-track to record a $200 billion deficit in Fiscal 2009 and a $241 billion in Fiscal 2010 -- and that's if the U.S. economy doesn't fall into a recession, Langan said, citing Congressional Budget Office data.

"The baseline CBO projections present a large budgetary task for the new president, but by itself it's not an impossible one, absent a major recession. The problem is there's no money available to tackle any other problems, including ones a Democratic president would address -- health care, energy policy, education and infrastructure. And don't forget the Iraq War, anti-terrorism efforts, and potential mortgage assistance programs," Langan said. "If there aren't changes to the tax code, given the current revenue structure and tax rates,to say the next president's hands are tied regarding new programs, would be an understatement."

Here's an item that's so laced with irony it defies comment -- I can't come up with a metaphor that does it justice. It's sort of like rearranging deck chairs on the Titanic, but it's much, much, much more pathetic.

President Bush's 2009 budget is expected to lead to a deficit of more than $400 billion. But not to worry, our fearless leader has a plan to cut back on spending.

According (subscription required) to the Wall Street Journal, "In years past, the White House's Office of Management and Budget distributed about 3,000 copies of the budget free to media outlets, congressional offices and elsewhere in the capital. This year, those folks must buy a printed copy or access one free online."

Members of Congress can get a copy for $67.50. Ordinary taxpayers hoping to get the details on how their elected officials plan to waste their money and then some will have to pay $213 -- or read it online.

The plan will save taxpayers an estimated $1 million over 5 years.

So $400 billion divided by $200,000... The President has found a way to shave off 1/2,000,000th of the projected deficit for 2009 that will be passed on to future generations.

Keep up the good work!

The dollar plunged to a two-year low versus Japan's yen Tuesday, and retreated against other major currencies, on fears the U.S. economy has fallen into a recession, Bloomberg News reported.

The dollar fell 1.26 yen to 106.90 versus the yen. Meanwhile, the British pound rose about 1.5 cents to $1.9704 in mid-day Tuesday trading. The dollar was virtually unchanged versus the euro at $1.4862.

Economists and analysts say a recession in the United States would invariably drive the dollar lower, due to foreign investors' reduced demand for dollar-denominated U.S assets, many of which would underperform during a recession. The dollar also would be hurt by lower interest rates, a near-certainty in the months ahead, with the U.S. Federal Reserve widely expected to again cut benchmark, short-term interest rates to jump start the U.S. economy.

What international transaction perhaps best symbolizes the U.S. dollar's rough year of 2007?

Giddy British tourists with more money to spend in New York than, seemingly, Donald Trump?

How about an international attraction that won't take dollars? In November 2007, India's Taj Mahal, one of the seven wonders of the ancient world and India's most popular shrine, announced it would no longer accept the dollar, citing the greenback's weak currency status, and accept only rupees, Bloomberg News reported Thursday.

Since January 2001 or during the past six years the dollar has fallen about 55% against the euro, 35% against the British pound, and about 10% against the Japan's yen. On Thursday the dollar was mixed against the world's major currencies. The dollar gained 0.62 cents to $1.4320 against the euro and 1.50 cents to $1.9831 against the British pound, but fell 0.25 yen against Japan's yen.

When a currency, such as the dollar, declines versus another currency, that means the purchasing power of those holding the dollar declines - - a sort of 'non-legislative' tax increase. It goes without saying that most citizens, and institutions, don't like to hold currencies that decline in purchasing power.