The dollar continued its recent decline Thursday as currency traders, along with bond and stock investors, confirmed a view that the Federal Reserve will not raise the fed funds rate on Aug. 8.

Gains or losses are theoretically limitless for stocks and bonds. But for the dollar, range-bound is still par for the course. While the greenback is likely to continue to decline if data flows in to support expectations for a weak economy and a Fed pause, the dynamics of the global economy will only let the U.S. dollar fall so far.

On Thursday, the dollar traded as low as 115.32, and was at 115.76 late Thursday vs. 115.88 Wednesday. The euro traded as high as 1.2769 early in the session, a level not seen since July 12, according to T.J. Marta, senior currency strategist at RBC Capital Markets. But the euro ended the day down 0.06% at 1.2699.

Currency trading, like the path of the global economy, is largely in the hands of central banks. Almost daily, "Asian officials" buy or sell assets to keep the U.S. dollar within a trading range relative to its major rivals, currency traders say.

On Thursday, traders said the euro's gains were capped when an "Asian official" -- most likely the Chinese central bank or an agent thereof -- came in and sold some euro assets.

The reason for the alleged interference? The much-debated global imbalances. China has taken the fruits of its massive export economy and amassed huge amounts of U.S. assets, which it stores in its reserves. China can't let the dollar weaken too much, or its dollar-heavy reserve portfolio would become massively undervalued. On Thursday, the "Asian official" couldn't let the euro get too strong, as that would drive down the dollar, which, being pegged to the Chinese yuan, would weaken China's reserves too much.

If the dollar fell more sharply, U.S. inflationary pressures would rise, perhaps leading to further Fed tightening, higher rates, a weaker consumer and, ultimately, less demand for Chinese imports. So goes the vicious cycle that has many politicians resurrecting protectionist policies.

"The U.S. dollar may not be able to advance, but I would not be unmitigatedly bullish on the other currencies," says Marta. (I suspect that Marta, in his quote above, unwittingly expressed a reason why many are bullish on gold, which jumped $11.30 to $646 per ounce in Comex trading Thursday.)

The idea that global imbalances are bad is widely accepted, but China and other emerging-market trade partners of America must take baby steps to diversify out of U.S. assets. If not, the somewhat shaky U.S. economy might topple the house of cards.

"For all the dangers of global imbalances, one of the benefits is that global liquidity tightening is not causing a collapse in emerging markets because these countries are now creditors," says Marta. "Global imbalances have caused a greater degree of interdependence."

U.S. companies, too, are increasingly dependent on growth around the world to ensure their houses are not toppled as the U.S. economy takes a breath.

On Thursday, the stock market had a positive initial reaction to mixed U.S. economic data on homes sales and durable goods, but the gains evaporated in the afternoon.

After trading as high as 11,187.76 intraday, the Dow Jones Industrial Average fell 0.02% to 11,100.43, while the Nasdaq Composite dropped 0.77% to 2054.47 and the S&P 500 slipped 0.41% to 1263.19. (Treasuries were barely changed, with the 10-year down 1/32 to yield 5.04%.)

Exxon Mobil's ( XOM) stock mirrored the broader market Thursday. The company posted strong earnings, which boosted its shares initially, but Exxon fell in the afternoon and closed down 0.20%. Coca Cola Enterprises ( CCE) was another stock that wasn't rewarded despite posting earnings that beat expectations; its shares fell 0.88%.

Shares of Comcast ( CMCSA) climbed 4.61% on its strong earnings, while Fortune Brands ( FO) added 5.17%.

Among Thursday's disappointments were Tellabs ( TLAB), which tumbled 15.9% after posting weak revenue guidance. Additionally, two mining companies, Newmont Mining ( NEM) and Anglogold Ashanti ( AU), posted disappointing results -- a telling turn as the leadership in the stock market rotates out of cyclical leaders like mining companies and into defensive sectors like consumer staples and health care. Newmont's shares fell 4.71%, and Anglogold's fell 4%.

Microsoft's ( MSFT)shares also fell late in Thursday's session on analyst concerns over the timing for delivery of its new Vista operating system. Its shares fell 2%.

The downdraft in previous market leadership is nowhere more obvious than in the Dow Jones Transportation Index, which fell another 1.4% Thursday. The Transports have fallen 13.9% since their all-time closing high on May 9.

On the economic front, the Commerce Department reported new-home sales fell more than expected in June and that May's figures were revised sharply lower. The median price of a new single-family home fell to $231,300 in June from $235,000 in May. The inventory of homes on the market increased to 6.1 months' worth from 5.9 months in May.

Meanwhile, durable goods orders climbed 3.1% in June, according to the Commerce Department, beating the 2% increase economists had forecast. Nontransportation orders gained 1% in June after climbing 1.5% in May.

But beneath the durable goods headlines, orders for nondefense capital goods (excluding aircraft) rose just 0.4% in June, bringing the cumulative change for the quarter to minus 0.4%, while shipments of these goods fell 0.2% last month, noted Miller Tabak chief fixed-income strategist Tony Crescenzi. "The shipments data will be plugged directly into Friday's GDP report, where many are expecting business spending to pick up the slack from the consumer," said Crescenzi, who writes for RealMoney.com. "If business spending on equipment and software is weaker than the roughly 10% gain expected by the consensus, concerns about the economy will likely grow."

So as investors in most markets embrace the economic slowdown, they embrace a Fed pause as well. The dollar may have a friend in Asia, but U.S. stocks will be waving from the quicksand if the Fed doesn't come through on its part of the bargain.
In keeping with TSC's editorial policy, Rappaport doesn't own or short individual stocks. She also doesn't invest in hedge funds or other private investment partnerships. She appreciates your feedback. Click here to send her an email.