– Agnes T. Crane is a Reuters columnist. The views expressed are her own –

It looks bad for the dollar, but looks can be deceiving.

Its sharp decline in the last week has pushed the euro to its highest level in a year and reignited fears that there’s only one place for the dollar to go, and that’s down.

Rhetoric from influential investors like Warren Buffett as well as big foreign buyers of U.S. debt like China and Russia has fed that sense of doom.

Then there’s the yen-like role of the dollar as the funding currency, which is casting a pall over the buck since the longer the Fed keeps a lid on interest rates, the longer the pressure stays on the currency.

Yet the dollar is still the No. 1 currency stashed in reserves around the world, by a long shot. International Monetary Fund data showed the dollar accounting for 65 percent of total allocated reserves in the first quarter.

That means there’s only so far you can push the currency before the self-interest of the world’s savers kicks in to support the buck.

First a little perspective. The dollar’s decline this year mirrors the rise in risky assets like U.S. junk-rated corporate debt that have returned to valuations seen before Lehman Brother’s implosion. Just as credit markets shut down and money poured into safe-haven U.S. Treasuries, the dollar soared as currency investors viewed it as a place to hunker down until the storm passes.

It may still be cloudy, but investors have been confident enough to venture back into riskier territory like emerging markets, which are booming.

That’s meant less money for U.S. assets. Recent data from the U.S. Treasury confirmed as much when it showed net foreign capital outflows of $97.5 billion in July, up from the exit of $56.8 billion in the previous month.

The Fed’s zero-bound interest rate policy has also turned the dollar into a funding currency, where investors borrow in the low yielding dollar and invest in nations that offer juicier returns.

“The dollar is selling off because we have low interest rates. That’s a macro fact,” said Marc Chandler, global head of currency strategy at Brown Brothers Harriman.

Yet, unlike the Japanese yen, which also served as a funding currency earlier this decade, the dollar, or rather dollar-denominated assets, continues to be sought after by nations with big reserves like China and Japan.

Brown Bothers Harriman notes that China snapped up $21.5 billion of such assets in July while Japan added $19.25 billion. Russia and Brazil, which are also sitting on stockpiles of reserves, trimmed their holdings by a relatively small amount.

This is significant. Earlier this year, China and Russia spooked currency markets when they began talking about the need for an alternative to the dollar for the world’s currency reserves.

Such an alternative would help savers like China better protect the value of their assets should the dollar fall out of favor, as it is now. Yet it could take years if not decades to implement.

That means the dollar is still the only game in town, rightly or wrongly, which should provide some comfort to those fearing the worst — a dollar in freefall without a net.

A year after the government's seizure of Fannie Mae, Freddie Mac and AIG , not to mention the bankruptcy of Lehman Brothers that sent the global financial system into a tailspin, very little has changed to prevent debt from being sliced and diced, again and again.

This is a mistake. Although there were many factors contributing to the downfall of the global financial system, the repackaging of toxic debt into esoteric financial products was at the heart of the credit crisis when it erupted in 2007.

It's easy to forget, particularly when many are focused on anniversary tick-tock accounts of the last days of Lehman Brothers, how nasty CDOs -- or worse, CDO squareds -- became so incredibly popular in the first place.

Yet, after all the damage, the trillions of dollars lost and the biggest state intervention in financial markets since the Depression, there has been no movement to ban their creation.

Securitization in its broadest form -- taking underlying collateral, bundling it together and selling it as tradable debt -- is still hailed as an important 20th-century invention that has helped worthy borrowers get the credit they need to buy a home, car, or education that would otherwise be out of their reach.

Policymakers, understandably, are anxious to get it started again after the market snapped shut last year. Wall Street, and investors taking advantage of generous financing from the Federal Reserve, are happy enough to oblige.

And it has worked. As of last week, new bonds backed by consumer debt reached $100.5 billion for the year, according to Barclays Capital. While a fraction of the pre-crisis market, that deal volume represents a healthy revival of a near-dead business. Three-quarters of the new deals are eligible for Fed financing.

The problem is phase II -- when these securities are then repackaged into something else. At the margins, it's already under way. Banks are repackaging problematic bonds backed by residential mortgages and the current disaster zone, commercial real estate loans, so they can slice off a new piece that can be resold with better protection.

The amounts are still small, but it's a reminder of the temptation to shift around a problem asset so investors can feel better about risk.

Although securitization has been around for more than 30 years, the housing and credit boom combined with the computing power of the 21st century gave rise to the proliferation of these repackaged goods filled with bad home loans.

Home loans, though, were just the most bountiful fodder to be found. The next go-around could involve using, say, bonds backed by life insurance policies -- the resurfacing fad among Wall Street banks -- as the building blocks for a new product.

In the name of simplicity and transparency, the repackaging of securities should just be banned, as I've argued before. This will ensure that junky debt doesn't get cut into so many pieces that understaffed regulators, rating agencies, investors and bank executives lose track of just who is left holding the bag should things head south.

Much of the public outcry and regulatory fervor has been focused on the banks and their reluctance to give up big bonuses for a job well done, or done badly as the case may be.

This is understandable, given the hardship banks and their creations have caused, but this won't necessarily prevent creative innovation from running amok.

Keeping banks from creating new products out of old ones will go a long way to make sure we're not right back where we started when the next crisis unfolds.

The Year Since Lehman -- related columns:

A year after Lehman, the good news

Banking? Keep it simple, stupid

A year on, it's still a housing story

It's hard not to be cynical about what the markets are supposedly telling us this week.

Don't get me wrong, I think markets can be a good barometer for sentiment and a leading indicator for trends before they bubble to the surface.

But their behavior this week suggests that the few traders and investors working during these dog days of summer are more interested in pushing prices around for short-term gain than making a bet on where the economy and financial markets are heading.

It's nothing new that trading desks are thinly staffed in the last weeks of summer, but after last year's rude interruption of summer holidays, more are taking advantage of the relative calm this year to soak their feet in the ocean rather than man the phones.

That's caused some interesting cross-currents that are making the message a bit of a muddle. Today, for example, oil prices rose early on hopes of an economic recovery while gold, a haven for those seeking a safe harbor, marched toward $1,000 per ounce as investors grew more cautious.

And Treasuries, after two days of solid gains despite better than expected economic data, fell today as investors continued to look to the stock market rather than data for clues.

Treasury yields, in fact, had been threatening to break back to lows seen in May even though the government has flooded the market with new notes -- $70 billion more to come next week -- and the economy has improved markedly since then.

Manufacturing is expanding, the rate of job losses, though still uncomfortably large, has slowed and the housing market that got the U.S. economy in such a mess in the first place is no longer in freefall.

And then there's the influence of the Chinese stock market. A 4.8 percent gain in the Shanghai Composite index got the ball rolling for global equities earlier today, but was the catalyst a data point or signs of better days ahead? No, it was a regulator telling investors that the market was healthy.

Earlier this week, the turning of the calendar to September -- a month that now strikes fear into even the most rational investor, after last year's meltdown punctuated what had already been a historically bad month for stocks -- did the trick.

Suddenly, investors worried about the health of the banking sector, even though the rally since March has been wedded to its supposed recovery.

Even Friday's jobs report, one of the most influential economic indicators, may not be enough to infuse much meaning. It comes ahead of a long holiday in the United States that brings an unofficial end to summer. That should make it even easier to push and pull prices around.

This should begin to change next week as holidays end and liquidity returns. That doesn't mean investors will like the message, but hopefully it will be clearer.

President Barack Obama's decision to reappoint Ben Bernanke as head of the Federal Reserve in the dog days of summer rather than tap new blood means that "Credit Crisis 2: The Exit" has a better chance of being a hit.

That's because timing and perception are essential in financial markets that ruthlessly punish uncertainty and any indication that the person at the helm of the central bank can't manage the many lifelines thrown during the credit crisis.

By announcing its decision in late August, the Obama administration ends speculation about whether Bernanke, who has his share of critics, would be bumped aside by candidates-in-waiting such as White House economic adviser Larry Summers.

And it does so when many market participants, like the Obamas, are on vacation, meaning that when the markets come alive again after the summer holidays, investors can be certain that the man who put the supports in place will there to see their careful removal.

This is important, since markets abhor uncertainty -- just take a look the punishment of bank stocks and bonds when an information vacuum earlier this year caused panic that the new Democratic administration would eventually nationalize troubled financial institutions.

The last thing the Fed or the Obama administration want are unnecessary distractions in the markets, which will have their hands full this fall trying to figure out whether improvements in the economy will stick, and how the Fed plans to unwind the mind-boggling amount of supports it's built to keep the financial system from collapsing. The Fed has already indicated that it will allow its Treasury purchasing program to wind down by the end of October, but it still needs to sort out how it plans to pull out of the mortgage-backed securities market, where it has vacuumed up roughly $767 billion of bonds, and, of course, how to eventually raise interest rates from their rock-bottom range of zero to 0.25 percent.

To say this is going to be difficult is a gross understatement. The Fed, rightly or wrongly, has intervened in financial markets to such an extent that its exit from them will be just as important as the creative policies put in place that stopped the world from collapsing.

Some of the groundwork for this exit will be laid in coming months, since the mortgage-backed securities program, for one, is due to expire at the end of the year. After that it's still unclear who will pick up the slack.

Financial markets, especially the bond market, are likely to start challenging the Fed on its interest-rate policy if economic growth snaps back in the second half of the year, as many economists now predict.

Keeping rates so low has had disastrous consequences before and it's going to take a persuasive and steady hand at the helm to convince investors not to panic should the Fed need to keep them in place for longer than usual, to ensure the economy has enough momentum to grow itself.

Bernanke, after a bruising start to his term, has earned the markets' confidence through his creative and quick-fire response to the credit crisis beginning two years ago. This isn't to say he may not lose it again along the way, but it will certainly help smooth the initial transition toward a less interventionist Fed.

This isn't to say Bernanke is a central bank saint, either. He was a Fed governor when many of the excesses built up, thanks to lax regulation. He also played down the importance of the subprime crisis on the broader economy early on, wasting an opportunity for earlier intervention.

It's safe to say that senators won't let him forget it when he sits for his confirmation hearings.

But he's the right man for a job that's far from finished.

Procrastination is not a virtue, except when it involves billions of dollars of debt.

A mantra has taken hold of lenders sitting on loan piles: amend and extend. Or as lawyers involved in negotiations between borrowers and lenders say: delay and pray.

The $6.7 trillion U.S. commercial real estate market has been a standout for such tactics and in part explains why, despite the rapid deterioration in property prices and cash flow, delinquencies and defaults so far have been relatively low.

In the smaller but once-powerful leveraged loan market, such tactics have also allowed some companies, many of whom tapped this market to finance some of the biggest leveraged buyouts this decade, to avoid default this year. That's a good thing because rapid-fire defaults could have kept credit markets clogged for longer and the financial system on precarious footing.

But such tactics just postpone the day of reckoning. They don't avoid it.

Amend and extend is essentially a short-term deal that allows a company to extend loan maturities that it can't possibly pay off in the current climate, while it agrees to stiffer terms such as adopting tougher loan covenants and paying higher interest payments.

Though areas of the credit markets are cranking out new debt deals, the leveraged loan market is a shadow of its former self. Collateralized debt obligations, which had accounted for roughly 60 percent of loan demand during the years of LBO madness, have vanished, as have hedge funds that used a healthy amount of leverage to snap up this secured debt.

That has left many companies with little choice but to go back to lenders and ask for more time to pay off debt that saddled many leverage buyout targets with debt ratios well above 6 to 1 -- traditionally seen as the do-or-die threshold.

The trouble is, the extensions have dumped many of these companies into the 2012 to 2014 hot zone when competition will be fiercest for refinancing dollars.

Bank of America Merrill Lynch analysts have found that the bulk of loans getting a new lease on life are now slated to mature between 2012 and 2014, when 85 percent of outstanding loans are due to mature.

Yet, the leveraged loan market is unlikely to return to its former glory, given the moribund state of CLOs, so borrowers will have to find the funding elsewhere. The lucky ones this year have found some solace in the high-yield bond market, where they've been able to refinance about $40 billion. But there's a wall of $545 billion of loans coming due between 2012 and 2014, according to Thomson Reuters data. It's going to take a strong economic recovery to get investors interested in snapping up the debt that needs to be refinanced in addition to the new loans that companies will need to fuel the expansion.

"If the economic recovery is not strong and these companies can't refinance, you're going to see an increase in defaults," said King Penniman, president and high-yield debt analyst at bond research shop KDP Investment Advisors.

So far, markets don't seem too bothered by the prospect but they should be. Such an overhang could mean the excesses of the credit boom will take much longer to wring out. And the road to recovery will be much longer than investors currently believe.

Don't blame global stock markets for being skittish. It is August, after all, a month that has spelled trouble in the past two years.

Recall that, a year ago, Fannie Mae and Freddie Mac started wobbling at the precipice while AIG, desperate for cash, began paying junk-like yields in the corporate bond market. A month later, all hell broke loose.

In August 2007, a shutdown in short-term lending markets forced global policy makers to rush in with a flood of liquidity to keep the lifeblood of the financial system from clotting.

So it's only natural that, this year, sellers are trigger-happy at the slightest whiff of trouble.

Problems surfaced in the United States last week, when a double-whammy of soft retail sales followed by a drop in consumer sentiment reignited worries that for all the good cheer about an emerging recovery, the exhausted American shopper is still unfit to carry the economy.

These concerns carried over into Monday trading in Asia, where they mingled with homegrown worries. In China, a drop-off in direct foreign investment helped fuel a nearly 6 percent decline in the Shanghai stock index and concerns about the Japanese economy helped trim more than 3 percent from the Nikkei.

U.S. stock indices have followed suit, with the S&P 500 off 2.43 percent and the Dow Jones Industrial Average off 2 percent.

Monday was an ugly day, but investors should try to rein in their anxiety about what it means for such big-picture questions as what shape the economic recovery will take. That's because a battle between bulls and bears, which typically emerges at economic turning points, has taken hold of financial markets -- meaning today's worries about the global economy are likely to morph into tomorrow's worries about too much stimulus creating dangerous asset bubbles.

It's a constant tension and one that will continue to push and pull financial markets for some time to come.

"The markets have very selectively reacted to economic data," says Stephen Stanley, chief economist at RBS. Little more than a week ago, for example, the S&P 500 hit a 10-month high after the U.S. reported "only" 247,000 workers were dropped from payrolls in July.

Given the big run up in risky assets like stocks and corporate debt since March, and last week's data, it's not surprising that investors are now worried that the rosier outlooks failed to take into account the growing fixation of the U.S. consumer on savings.

Take price-earnings ratios. Bespoke Investment Group noted last week that the P/E ratio of companies in the S&P 500 climbed to its highest peak since 2004, as earnings failed to keep pace with the optimism that fueled a 50 percent jump in the S&P 500 stock index since March. For earnings to catch up, the consumer will have to shake off worries about high unemployment rates and pitch in with good old-fashioned shopping. So far, that's looking like a stretch.

So, chalk up the stock declines to correcting what had become overbought conditions and get ready for more choppiness ahead.

This is the messy reality of turning points, not necessarily the foreshadowing of something truly ugly to come. Even if it is August.

It's no wonder that the Federal Reserve has a watchful eye on commercial real estate. Lending hasn't come back, prices are plummeting and those that poured funds into the sector during real estate boom are getting killed by high vacancy rates and falling rents.

Maguire Properties is one such company. The Wall Street Journal reports the debt-laden REIT is handing over seven buildings to its creditors along with the $1.06 billion of debt that comes along with them. But rather than restructure the debt, the creditors may try to offload them into an extremely soft market, suggesting they'd rather take their lumps now rather than wait for a snapback in the market that may well be years away.

That's not good news for office building prices since such sales could pressure prices even further.

Chief Executive Nelson Rising, who was brought in by the company's board last year to succeed Mr. Maguire, said in an interview that restructuring the debt on six of the buildings, located in Orange County and Los Angeles, is one possibility. But he said the most likely scenario is that the mortgage holders will take over the properties and try to sell them. Maguire already has a deal to turn over one of the buildings, Park Place One, in Irvine, Calif., to LBA Realty, a real-estate company that acquired the debt on the property at a discount in the spring. A telephone call placed to LBA's principal wasn't returned.

Among the office buildings that Maguire will turn over to creditors is Stadium Towers Plaza.

The debt on the other six properties was packaged by Wall Street firms and sold as commercial mortgage backed securities, or CMBS, to dozens of institutional investors. Mr. Rising said that Maguire would work closely with the servicers of that debt to transfer control of the buildings. The seven buildings, with 4.2 million square feet, make up about 20% of Maguire's portfolio.

The CMBS market, though on firmer footing thanks to government programs to revitalize it, still hasn't seen any new issuance since the market closed down last year. That makes refinancing debt difficult if not impossible since banks and insurance companies - the other big lenders - have all but abandoned the sector.

As the FOMC meets this week, CMBS and the broader commercial real estate market is sure to be on policymakers' minds as they consider what stimulative programs should die a natural death and which ones need more time to work their magic. While the Treasury purchases are likely to among the first significant program to wind down, the dismal state of commercial real estate suggests that its lending facilities for CMBS will be with us for a long time to come.

The ADP jobs report shows that the private sector shed another 371K in July, slightly higher than expected. Reuters story here. This should cool the heels of the bulls who were hoping for a stronger-than-expected number that would have further fueled sentiment that things are looking up for the U.S. economy.

The government will release its closely watched report that includes public sector jobs as well on Friday.  The market is looking for a similar reading of a 325 to 375 decline.

The continued bleeding of jobs continues to be one of the biggest headwinds for the struggling economy since it threatens to spark a negative feedback loop just as other problem areas stabilize. With savings rates extremely low heading into the current recession and debt loads high, many are woefully underprepared to weather unemployment. Already delinquencies among homeowners with good credit are falling behind on their mortgages. The FT reports that delinquencies among prime borrowers is on the rise.

Though the decline in July is the smallest since October, it's hardly anything to cheer about.

– Agnes T. Crane is a Reuters columnist. The views expressed are her own –

Sometimes a failed lender is just a failed lender.

The relatively small size of CIT Group is a big reason the middle-market lender is headed to the wood chopper as soon as Friday. But the lender’s decision to move aggressively into the world of risky lending and not regroup when troubles in the credit markets first emerged is a classic case of bad decision-making and bad timing striking the mortal blow.

Indeed, one should resist the temptation to draw broader conclusions from a CIT bankruptcy in a world where the government is saving some banks and leaving others to languish.

CIT is no stranger to skirting the edge of trouble. In 2002, it had a near-death experience when problems at its scandal-plagued parent Tyco International cost it access to essential short-term financing. Tapping a credit line averted disaster then.

That lesson seemed to have been lost on Jeffrey Peek, a former Wall Street investment banker. He joined the company just a year later, becoming CEO in 2004. Peek then led the once-under-the-radar lender into the world of subprime loans, student lending and leveraged buyouts at a time when such ventures were hailed as the Promised Land for companies and executives with big ambitions.

But like others on Wall Street, he funded his aspirations through credit markets and by 2007 they had grown tired of such risky ventures and promptly shut off the financing spigot. The drought threw Countrywide Financial, the lender that fed the nation’s housing addiction with questionable loans, into the arms of Bank of America — a clear warning sign to those that relied on debt markets to start shoring up their capital with other sources of funding.

“Management should have addressed their funding problems two years ago,” said Sean Egan, president of Egan-Jones Ratings Co.

For CIT, the death blow came in March 2008 — six months before the financial firm bloodbath that spooked Congress into handing over more than $700 billion to save the financial system. Credit ratings downgrades left the company little choice but to draw on a credit facility — a sure signal of weakness from which it never recovered.

In December, the government still chose to give it a $2.33 billion infusion of TARP funds after the company converted itself into a bank holding company.

In hindsight, it’s a wonder that the government gave the lender funds in the first place, but then again it was handing out lots of funds at a time when it thought broad brush-strokes were needed to stabilize the financial system.

Times have changed and it looks like CIT’s time is up. Financial markets are stable, and earnings from JPMorgan Chase and Goldman Sachs Group this week show that the big banks are now far from failing.

The government’s refusal to give it a second shot in the arm this week isn’t surprising given the rapid deterioration of its collateral.

That CIT is expected to leave only small ripples rather than a Lehman Brothers tsunami makes a bankruptcy less ominous and easier for the government to draw the line.

But for those angry about CIT’s demise, keep your wrath focused on the company and its excessive risk-taking. It helped create a credit crunch that’s about to get worse for the little guy.