The currency markets, like most other financial markets, rise and fall partly based on international confidence in the economies, politics and monetary and taxation policies of the various nations whose paper money is traded through international exchanges.

The U.S. dollar enjoys a current status as a reserve currency.
 
The Wikipedia Free Encyclopedia defines a reserve currency as "a currency which is held in significant quantities by many governments and institutions as part of their foreign exchange reserves. It also tends to be the international pricing currency for products traded on a global market, such as oil, gold, etc."

The question in my mind regarding the future direction of the U.S. dollar is whether the unrestrained spending in Obama's current budget and higher taxes on successful small business owners (constraining job and economic growth) will be a double blow to the international worth of the dollar. Could the third blow be Fed Chairman Bernanke's self-proclaimed "monetary ease" that endangers the status of the dollar, depreciating its value through the tax of high inflation that could impoverish Obama's cherished middle class?
 
I think that the answer to these questions may be "yes." The dollar could fall back dramatically. Reckless fiscal policies combined with slower growth do not add up to a sound federal balance sheet, but this appears to be precisely where we are heading.
 
Should inflation ramp up in the next few years, the dollar's value in any country and account could be greatly damaged, causing further worldwide economic pain. Our citizens could find it too expensive to travel internationally (even more so than at present).
 
But should our leaders adopt a plan of responsible use of American taxpayer money, whereby the growth of federal spending is controlled and the authorities do not embark on huge "investments" in projects that our resources do not allow, then our dollar and our financial system may be rescued.
 
Longer term monetary policies are designed to be independent of shorter term political winds, and so we need to rely on the wisdom of those officials who determine monetary policy. However, economist Milton Friedman may have had it right when he suggested that the Fed should grow the money supply at a constant rate, whether we are in a boom or recession, in order to avoid the widest swings of the economy and implosions in our financial markets. 
 
Prior to the international credit crisis and housing depression, there was already currency "portfolio adjustment" by wealth holders away from holding the U.S. dollar, with movement toward the euro and other strong currencies. China's central bank governor wrote in March 2009 that nations should in time replace the dollar as a reserve currency. This would no longer allow the U.S. to continue problematic economic policies (because it is a reserve unit) that may endanger other economies. In the midst of increased uncertainty regarding the future of the dollar, the gold market has regained stature as an investment asset class, about which I have written on this website for over two years.
 
We have to dig ourselves out of the hole we are in somehow. Just as our government now expects its citizens not to buy houses they cannot afford (and also that banks and mortgage brokers should not "game" the mortgage process for all it is worth), our leaders should respect the tradition of a free economy governed by the principles of fiscal restraint and sound money. After all, it is our money and our economy's future at stake.
 
An all-weather investment given a potential decline in the value of the dollar is widely known to be gold, and it would likely also benefit from increased inflation or even times of social unrest. The gold market might also prosper during the less likely scenario (in my view) of enduring deflation.
 
Inflation hedges in the stock market may also perform well. Established integrated oil companies are likely to maintain their advantage in providing energy while potentially providing some downside protection due to their combination of oil production and refining capacity.
 
On the currency front, the dollar index appears to be entering an area of long term resistance, and I believe it may decline. Specifically, the British pound may be finding footing at $1.40 at a sixteen-year long shelf of support on the monthly chart and may rally in the medium term, though its longer term value may be in question. The euro may soon find support on the weekly and monthly charts. And the Japanese yen may be retracing back to support at its breakout point from a ten-year sideways pattern on the monthly chart.
 
I have replaced my shares of the Barclays Bank IPath Exchange Traded Note USD/Japanese Yen Exchange Rate with the CurrencyShares Japanese Yen. I continue to hold a position in the Templeton Global Bond and the Franklin Templeton Hard Currency Funds (both beneficiaries of a falling dollar), as well as a diversified portfolio of equities and other mutual funds. I have held physical gold for years, though may look to unload some or all of it should a bubble appear in the gold market in the next year or two.