For many economists, the dollar's jagged yearlong slide is just a side effect of an inevitable contraction in the nation's huge trade deficit. But current economic and political conditions are making the process more perilous than it might otherwise have been.

Recently, the dollar's exchange rates have bounced up and down with news from the Iraq war: late yesterday, on news of American military progress toward Baghdad, it reached 118.98 yen, up 0.76 percent from Tuesday. But the dollar's overall trend in the last year has been distinctly downward. Weighted by the volumes of trade with other countries and adjusted for inflation, an average of the rates dropped 4.4 percent from March 2002 to last month.

A steeper decline could be on the way, though. The run-up to the war in Iraq hurt the American economy, and fears of similar conflicts to follow could deter foreigners from holding dollar-denominated securities. With less demand for the securities, there would be less need for dollars."

"Perceptions are very important," said Kermit L. Schoenholtz, chief economist of Salomon Smith Barney. "If people believe that the events we've seen in Iraq are not one-off events, it will affect their investments."