Where have you gone, Joe DiMaggio?
A nation turns its lonely eyes to you
Woo woo woo…

What’s that you say, Mrs. Robinson
“Joltin Joe” has left and gone away?
Hey hey hey, hey hey hey!
   —Paul Simon, from Mrs. Robinson (The Graduate)

Just before the Easter weekend, the Wall Street Journal’s Dollar’s Decline Speeds Up, With Risks for U.S. spelled out the alarming decline of the dollar.

Image Removed The U.S. dollar’s downward slide is accelerating as low interest rates, inflation concerns and the massive federal budget deficit undermine the currency.

With no relief in sight for the dollar on any of those fronts, the downward pressure on the dollar is widely expected to continue.

The dollar fell nearly 1% against a broad basket of currencies this week, following a drop of similar size last week. The ICE U.S. Dollar Index closed at its lowest level since August 2008, before the financial crisis intensified…

The main driver for the dollar’s decline is low interest rates in the U.S. compared with higher and rising rates abroad. Lower rates mean a lower return on cash—and the pressure from that factor could intensify next week when the Federal Reserve’s rate-setting committee is expected to signal that U.S. short-term rates will likely remain near zero for many months to come. On Wednesday, Fed Chairman Ben Bernanke is scheduled to give the central bank’s first-ever press conference following a policy-setting meeting.

But it is worry about the U.S. budget deficit that is intensifying the selloff. On Monday, investors were spooked by a warning from Standard & Poor’s that it might take away the U.S. government’s coveted AAA rating status amid concerns the Obama administration and Republicans in Congress might not be able to agree to significant reductions in the deficit.

In addition, Chinese government officials have stepped up rhetoric hinting they might diversify their $3 trillion of currency reserves away from U.S. dollars. Such a shift would chip away at what has been a substantial source of dollar-buying in recent years.

Just as Tim Geithner, Paul Krugman and other China bashers have wanted, the Chinese have allowed the Yuan to rise in value, in part to dampen their severe inflation problem.

China has in recent weeks been allowing its currency, the yuan, to appreciate steadily. This poses two challenges to the dollar.

  • First, the more Beijing lets its currency rise, the less it needs to buy dollars to offset yuan strength.
  • Second, other Asian countries that compete with China for exports may also allow their currencies to strengthen against the dollar.

Washington has been pushing Beijing to let the yuan rise against the dollar and other currencies, in order, among other things, to help reduce the U.S. trade deficit. But a continued decline in the value of the dollar is a double-edged sword for the U.S. economy.

It’s a “double-edged sword” for our economy because the weakening dollar raises the price of imported goods for Americans, including the price of oil. That’s the Bad News. The Good News, we’ve always been told by Krugman and the rest, is that a weaker dollar supports American exports.

A weaker dollar is a boon for U.S. exporters by making their goods more competitively priced. This has been a tailwind for technology companies and manufacturers, a bright spot in the otherwise slow economic recovery.

Since the recovery started in the third quarter of 2009, exports have contributed about 1.4 percentage points to the nation’s 3.0% annualized growth rate, marking trade’s biggest share of growth over an 18-month stretch on record.

There is a source of comfort, the Journal’s Tom Lauricella tells us.

One source of comfort for the government is that the dollar’s decline has been orderly. Against a broad basket of currencies, the dollar is down 9.1% from a year ago. In 2003 and 2004—a period of very low interest rates engineered by Mr. Bernanke’s predecessor, Alan Greenspan—it registered annual declines of closer to 10%.

An orderly decline. That makes me feel better! I think this is a good time to throw in the long-term dollar chart, don’t you?

Image Removed

There is little doubt that a weak dollar is the “unofficial” policy of the Treasury and the Federal Reserve. Even as I write this, I can hear the feverish, fearful cries of the Dollar Collapsers, the Gold Bugs, the Hyperinflationistas, and many others calling out to me, telling me in no uncertain terms to buy gold, silver, oil, corn, wheat—anything with tangible value I can get my hands on. But like the vast majority of Americans, I am not in position financially to buy any of these things. I must use dollars. As CNBC tells me, if I don’t like a weak dollar, I might as well get used to it. Get used to it?

In short, as trader Dennis Gartman noted Thursday, “the rout of the US dollar” is in full effect.

“Panic dollar selling is setting in,” Gartman, a hedge fund manager and author of “The Gartman Letter,” wrote in his daily commentary. “This may carry farther than any of us dream of or, worse, have nightmares of.”

How low can it go?

Rick Bensignor, chief market strategist at Dahlman Rose in New York, said the dollar index, which measures the greenback against a basket of select other global currencies, has scant technical support “that has any meaning” between its present level and the historical low of 70.70

Food prices also are on a steady climb higher. In both cases, a weak dollar is at least somewhat to blame as it drives commodities, which are priced in dollars and therefore cheaper and more attractive to speculators in the global marketplace.

But the stock market has enjoyed the weak dollar.

The Standard & Poor’s 500 and the dollar have had almost a perfectly inverse relationship this year, with the stock index gaining just over 6 percent in 2011 and the dollar losing 6.5 percent.

Thus we have the usual story. The predominantly wealthy investors in the stock market are thriving, while the rest of us seek shelter from the storm. And what if those crafty Chinese start dumping dollars—they’re holding over 3,000,000,000,000 of them—like there’s no tomorrow? And who will buy our Treasury bonds? And why do I have this sinking feeling? Why am I filled with unsettling, nebulous feelings of impending ruin? I hope our esteemed Fed chairman, Dr. Ben Bernanke, will address these questions during his upcoming Wednesday press conference. Like the rest of you, I hang on his every word Image Removed

How low can the dollar go?  I think we’re about to find out.