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After my previous posts in this series grappled with the likely plight of the falling dollar and some of the economic implications of its privileged status in the global economy, this concluding post will consider the question:

What do the dollar's role and value mean for U.S. foreign policy?

There is a macho tinge to the U.S. Treasury mantra that a strong dollar is in the U.S. interest. After all, isn't it always better to be strong than weak? There is a suggestion that at $1 to the euro, we are virile and able to bend other nations to our will, while at $2 to the euro, we will be feeble and submissive.

It is not obvious why that should be so. There are a couple upsides to a weaker dollar. Fred Bergsten, in a new Foreign Affairs analysis, argues that "the United States itself would benefit from a reduction in the international role of the dollar." In Bergsten's view, the easy credit that has accompanied dollar primacy has tempted the country into misguided policies. He writes: "Unless the United States quickly achieves and maintains a sustainable economic position, its ability to pursue autonomous economic and foreign policies will become increasingly compromised." A falling dollar is thus a mechanism whereby excessive U.S. borrowing from abroad can be rolled back. To the extent a weakened dollar would bring about such global rebalancing, it would help to meet a stated goal of world leaders in recent G-20 meetings.

Beyond this indirect gain, the most direct effect of a weakened dollar would be to hike the cost of goods imported into the United States and make American goods appear cheaper to the rest of the world. This, over time, would likely ease the pressures for trade protectionism that have increasingly strained U.S. relations with countries like China, Canada, Mexico, and the members of the European Union.

Each of those benefits to a diminished dollar shares a similar quality. Under a strong dollar, the argument goes, we cannot resist the temptation to sin. We know that excessive borrowing is a bad idea, but we just can't help ourselves. We know that trade protection is ill-advised, but who can resist the political pressure?

As soon as we move away from introspection, we see some of the foreign policy downsides to a weaker dollar. The first and most direct are the economic impacts. With a weaker dollar, all U.S. ventures abroad become more expensive. During the period of the dollar's decline, the United States becomes less attractive as an investment destination, since foreign investors would expect to recoup fewer yen, yuan, or euros when they cash out. Future financial crises--and they are sure to come--will be much more painful if global investors do not rush to the dollar as a safe haven.

An even greater difficulty, from a foreign policy standpoint, could be a sense among allies that the United States is an unreliable partner. As the provider of the world's reserve currency, America has had both special rights and special obligations. The rights have included the ability to print money to pay for whatever we liked (technical term: seigniorage). The obligation has been to keep the value of the dollar relatively stable. From the reactions to the dollar's recent slide, we can anticipate the sort of discord that might accompany a more significant move. From Thursday's Washington Post:

The weak dollar is becoming a source of international tension, particularly in U.S.-European relations. Officials in the 16 countries that use the euro warn a continued slide of the dollar may pose long-term structural problems for Europe, forcing down wages and hurting employment in the months and years ahead. This week, a top aide to French President Nicolas Sarkozy called the value of the dollar "a disaster" for Europe, warning of dire consequences to the global economy if it remains at its current levels.

China reacted to U.S. borrowing plans at the beginning of this year with a call for guarantees of the value of its dollar lending. They were clearly worried about a depreciation of the dollar, which would undercut the value of China's massive reserves. While G-20 nations were calling for global rebalancing at their Pittsburgh summit (by which they really meant that China should appreciate its currency and import more goods), Chinese President Hu Jintao said:

Major reserve-currency issuing countries should take into account and balance the implications of their monetary policies for both their own economies and the world economy with a view to upholding stability of international financial markets.

This nicely captures the dilemma facing the Obama Administration. How do you catch a falling dollar? A classic approach would be for the U.S. government to stand ready to raise interest rates and adopt plans for future fiscal austerity. It would be responsible, but it would not be much fun, particularly at a time when U.S. unemployment is approaching 10 percent.

Suppose, instead, the dollar continues to slide and loses its premier status among world currencies. There could be domestic political benefits, but it would leave key countries economically bruised and seething. It is very difficult to tell such a story in which the United States' standing, prestige, and ability to project power do not decline along with its currency. U.S. foreign policy prowess would not be immune should the dollar fall from grace.

Philip I. Levy is a resident scholar at AEI.