With the dollar falling this week to 14-year lows against the Japanese yen, many questioned whether the greenback would continue to drop. But the dollar rebounded strongly Friday on news that unemployment rates were declining, prompting questions of whether the rebound will rise even higher.

On Friday, the dollar traded at 90.7 yen, up sharply from Tuesday, when the yen traded at lower than 87 yen against the dollar -- the lowest point since July 1995. Friday saw the dollar gaining against the euro and other currencies as well.

According to a recent Bloomberg survey, the median prediction among 43 strategists showed that the U.S. currency may gain against the euro, yen, Swiss franc, British pound and Swedish krona by Sept. 30, 2010. The same survey, however, indicated that the top forecasters among those polled predicted the greenback will continue to weaken, even if the Fed begins to raise interest rates, although officials said that is some time away.

    Douglas Elliott, a fellow at the Washington, D.C.-based Brookings Institution, said the question to ask is whether the dollar is balanced where it is.

    "It's hard to get the balance right," he said.

    And while the United States stands to benefit from a modestly lower dollar -- a sharp decline would be harmful -- it is unclear whether the U.S. currency will rise or fall.

    Indeed, investors could bid the currency in either direction.

    "Markets have a tendency to overshoot both up and down," he said. "And the problem is that markets often move in jagged ways."

    Chad Stone, chief economist at the Washington, D.C.-based Center on Budget and Policy Priorities, said the dollar's fall is a negative development only if it occurs sharply, rather than gradually.

    "What you want is a gradual adjustment, but if that turns into a flight from the dollar, that's a different world," he said.

    While many fret that the rising deficit will push the dollar to harmful lows, it is more important to cast those fears aside for now and focus on revving up the economy. Paying off the debt can wait until later, he said.

    Still, a long-term failure to get the deficit under control could spell trouble for the dollar down the road, he added.

    Nevertheless, a continued dollar decline is not written in stone, as an economy's strength and interest rates also play a role in determining a currency's value.

    The dollar could begin to move back up in 2010 if the U.S. economic rebound sees solid gains in gross domestic product, analysts said. A rise in interest rates and Congressional moves to cut the deficit could also stem the dollar's downward trajectory.

    And despite nervous talk, a weakening dollar is not always a bad thing: The slipping currency underscores heightened investor confidence as the economy rebounds, after panicked investors sought a safe haven in the greenback at the height of the recession, economists said. A cheap dollar is also good for U.S. exports.

    Ben Carliner, director of research at the Washington, D.C.-based Economic Strategy Institute, said the dollar has adjusted against the euro, yen and other floating currencies.

    "We are unlikely to see significant further falls in the value of the dollar against the euro and yen," he said.

    A major factor driving down the dollar is the "carry trade," which occurs when investors borrow low-interest rate currencies and invest them in other assets.

    And while weakening the greenback, the practice is fueling the rise of equity markets in places like India, Brazil and Russia, Carliner noted.

    "Basically, because U.S. interest rates are so low, investors are borrowing in dollars and then converting these dollars into Brazilian reais or Russian rubles and investing in higher yielding assets in these countries," he said.

    Brazil has already taken steps to discourage short-term speculative inflows to its financial markets, because leaders there are fretting over the formation of domestic bubbles, a rising real, and the possibility of a jarring reversal of those flows, he said.

    Other emerging markets will likely consider similar steps if their currencies continue appreciating against the dollar because of the carry trade, he said.

    For the United States, the dollar exchange rate will become an increasingly important measure of monetary policy as the Fed tries to withdraw some of its monetary stimulus as the economy improves, Carliner said.

    Indeed, U.S. Federal Reserve Chairman Ben Bernanke recently made an unusual public defense of a strong dollar, he noted. 

 "(That) shows that the Fed is increasingly taking the value of the dollar into account as it sets monetary policy," he said. Whether it continues to slide or not, economists said the dollar is highly unlikely to be replaced as the world's currency of choice, as the United States represents nearly a quarter of the world's economy and so many countries hold dollars that no central bank would allow it to depreciate to the point of losing status.

Still, it is true that no one possesses a crystal ball that can predict every movement the dollar makes.  "No one knows for sure which way the dollar will go," Elliott said. "If people knew, they would already be trading on that basis."