Dollar DoldrumsThe dollar's recent bounce may have shaken the dollar bears, but it hasn't collapsed their case. Just last week, the U.S. trade deficit, aggravated by surging imports of oil and textiles, soared to an all-time high of $61.04 billion in February. And while the budget deficit narrowed in March, the Treasury still reported a $71.23 billion budget gap last month. The cumulative deficit for fiscal-year 2005 was $294.65 billion, down from a cumulative $301.40 billion in the first six months of fiscal 2004 ended Sept. 30. If the U.S. doesn't work to reverse these shortfalls, the dollar bears say it could lead to a crisis of confidence among the international lenders currently buying U.S. Treasury notes. The Japanese and Chinese governments, for example, hold a combined $900 billion in U.S. Treasuries, and even the slightest hint of their plans to diversify away from the dollar would cause major volatility in the bond and equity markets. "The current account problems we saw last week are proof there are ongoing trade issues, so it's a reasonable idea that the dollar could go down," says Ian Kelson, portfolio manager for the unhedged $1.8 billion ( RPIBX) T. Rowe Price International Bond fund. "But on the other side, there is interest rate support for U.S. securities because growth in Europe and Japan is still slow." Kelson adds that there is even a pervasive argument that rates should be cut in Europe to spur growth, though he believes euroland will simply opt to maintain current levels until growth is less patchy. Arthur Steinmetz, portfolio manager for the $2.6 billion unhedged ( OIBAX) Oppenheimer International Bond fund, says the dollar has reached the point of being undervalued against the euro, but Asian currencies still look attractive. "An end to zero rates in Japan and the end of the Chinese currency pegs are events that loom in the future that will provide the next leg of dollar weakness against Asian currencies," he says.