I have not been blogging much about investing or the economy lately but 2006 continues to confuse me.

With widespread expectations that corporate profits would be down in 2007, I have been expecting the stock market to drop. It has risen.

What has been falling is the value of the US$. Something I haven't been thinking about (and no one has been talking about) for over a year. Our ballooning Federal deficit and the falling US$ seem to be unpopular topics in the face of a rising stock market and Iraq.

Trying to lower trade deficits by weakening the US$ has questionable value over the long term. I have doubts that getting China to raise the Yuan will help our failing manufacturing industries very much.

As Dollar Weakens, Paulson Faces Challenge of Tempering Its Decline

By MICHAEL M. PHILLIPS in Washington, JOANNA SLATER in New York and ALISTAIR MACDONALD in London

Wall Street Journal

December 1, 2006

The dollar's continued slide against the euro and British pound highlights the delicate task faced by Treasury Secretary Henry Paulson: allowing the U.S. currency to weaken slowly against other currencies without sending it into a plunge that would damage the nation's economy.

Mr. Paulson has chosen to follow in the footsteps of his predecessor, John Snow, by acquiescing as markets pull the dollar lower. Yesterday, the dollar hit a 20-month low against the euro and a 14-year low against the pound. Over the past year, it has dropped 6.7% against a Federal Reserve index of seven major currencies.

Though Bush administration economic officials are eager to avoid a market-rattling crash, a weaker dollar could help the U.S. deflate its ballooning trade deficit by making American goods cheaper abroad and foreign goods pricier for Americans. It also could help Mr. Paulson fend off what he considers an alarming rise in protectionist sentiment.

"It's very hard for the Treasury secretary to say anything about the dollar without getting into trouble," says Mr. Hormats. "It's very easy for him to do nothing about the dollar and stay out of trouble, and I think that's what they're going to do. You've got to talk the strong dollar -- and not do anything if the dollar weakens."

Mr. Paulson has to tread carefully when it comes to the dollar, balancing competing domestic interests, the administration's own laissez-faire philosophy and the risk of a misstep that could roil financial markets. If he presses overtly for a broad decline in the dollar, he risks spooking financial markets and turning a gradual slide into a steep drop.

Mr. Paulson is expected to renew his push for the Chinese government to relax its grip on the yuan when he leads a large, high-level U.S. delegation to China later this month.

"We want him to convince [China] to move" on its currency policy, says NAM's Mr. Vargo. "If it doesn't happen, you can believe there will be renewed efforts in Congress to pass legislation of some sort or other, and protectionism is going to rise."

Some strategists, meanwhile, expect downward pressure on the dollar against European currencies to persist for the rest of the year as worries about the vigor of the U.S. economy mount. Yesterday's U.S. economic data, particularly a weak reading on the Chicago purchasing-managers index and a report showing a jump in the nation's number of job seekers, contributed to the dollar's decline.