U.S. officials think the dollar has fallen far enough, and a deeper decline would risk stoking already hot inflation while providing only a marginal added kick to exports.
The U.S. Treasury Department stood quietly by while the currency dropped some 30 percent since 2002, in part because economists widely believed the dollar was overvalued and the United States needed to rein in a massive trade deficit.
A weaker dollar lifts exports, which have been among the few bright spots this year in an otherwise shaky U.S. economy.
But in recent weeks, subtle shifts in Treasury Secretary Henry Paulson's rhetoric and unusually blunt comments from Federal Reserve Chairman Ben Bernanke suggest that officials think enough is enough.
Treasury and Fed officials recently told the International Monetary Fund that the dollar had "moved in line with fundamentals," another way of saying that they thought further sharp declines were unwarranted.
How they would respond to another deep slide is unclear.
Both Bernanke and Paulson have said that they wouldn't rule out currency market interventions, but neither seems eager to take such a step. Instead, the focus appears to be on shoring up confidence in the financial sector so that foreign investors won't lose faith in all U.S. assets, including the dollar.
"I don't think that official Washington is comfortable with the currency where it is and they would like it to be higher, both in order to take some pressure off currency markets and because it would be reassuring for investors. But as much as they don't want it to be lower in value, I don't think they're in the mood for strong measures to defend it," said David Gilmore, a partner at FX Analytics in Essex, Connecticut.
"The choices aren't great for them (if they did have to defend it) and I don't sense that any of them have great confidence in the effectiveness of currency intervention."
Barcelona Ben
Paulson took up the cudgels for the dollar during a Mideast trip in June, telling an audience in Abu Dhabi that he was "committed to promoting policies that ... ensure that the dollar remains the world's reserve currency."
And Bernanke raised eyebrows in early June when he took the rare step of warning that the weak dollar risked driving up inflation. Normally, currency issues are the purview of the Treasury, not the Fed.
In a speech to a conference in Barcelona, Bernanke stressed that the U.S. central bank and Treasury would "carefully monitor" currency market developments, signaling growing concern among U.S. officials about the dollar's slide and prompting speculation about an intervention.
"We are attentive to the implications of changes in the value of the dollar for inflation and inflation expectations," Bernanke said.
A falling dollar drives up the cost of imported goods, particularly oil, which accounts for a hefty portion of the U.S. trade deficit and which has pushed inflation uncomfortably high.
That has complicated policy for Bernanke, who has little leeway to raise interest rates to tackle price pressures while financial markets remain fragile. At the same time, lowering borrowing costs would hurt the dollar, which would likely push inflation even higher.
As a result, the Fed is widely expected to leave its benchmark federal funds rate unchanged when its policy-setting committee meets next week. Rather than cutting rates, the Fed has launched a series of lending facilities aimed at easing credit strains and reducing banks' borrowing costs.
Since that Barcelona speech, the dollar has traded in a narrow range, despite unsettling news about mortgage finance companies Fannie Mae and Freddie Mac and another round of losses and write-downs at major U.S. financial firms.
Indeed, the dollar's precarious position was probably one of the reasons why the Treasury and Fed stepped in earlier this month to bolster Fannie and Freddie, whose debt is widely held worldwide.
Paulson extended a bigger credit line and offered to buy stakes in the mortgage finance agencies, if needed, to keep them sound.
"If there is a worry about the quality of U.S. securities -- for example, if there was further worry about agencies (Fannie and Freddie) -- that could affect the short-term movement of the dollar," said Raghuram Rajan, a professor at the University of Chicago's Graduate School of Business and former IMF chief economist.
Predicting and explaining short-term movements in currency markets is notoriously fraught, so Rajan said there was little point trying to pin the dollar's recent stability on anything the Fed or Treasury had done.
But in the medium term, the dollar's value is considered a good proxy for the health of the U.S. economy, including the financial firms. Rajan said that while the currency had probably declined enough to bring down the current account deficit, it would remain under strain until clouds lifted from the financial sector.
That means that the best way for the Treasury and Fed to defend the dollar without intervening in currency markets is to restore the smooth functioning of Wall Street.
And that means the Fed will keep looking for ways to reduce banks' borrowing costs without lowering interest rates.