The dollar is in a free-fall. The U.S. currency dropped below 96 yen in early trading in Asia, before recovering to trade around 97 yen, after the Fed’s latest efforts to ease problems in the credit markets - including its backing of the panicked sale of Bear Stearns (BSC) to JPMorgan Chase (JPM).

The Fed’s decision to let securities firms borrow at its discount window for emergency lending is “extraordinary,” Greg Ip writes in The Wall Street Journal. Yves Smith writes at Naked Capitalism that the move raises eyebrows because the Fed doesn’t supervise securities dealers, so it can’t be certain the firms it’s lending to are sound. At Interfluidity, Steve Waldman contends the Fed’s decision to expand discount window eligibility beyond banks marks an effort to prevent another firm from falling under attack the way Bear Stearns did last week. Even so, Calculated Risk wonders if Lehman Brothers (LEH) could be the next firm to face a liquidity crunch.

Whatever happens in the U.S.  stock market Monday, worries about the dollar - it recently traded at $1.59 to the euro, another all-time high for the European currency - could gain new prominence this week. The Federal Reserve, after all, is expected to cut its fed funds overnight lending target again on Tuesday, by as much as a full percentage point. With every decline in the dollar making Americans poorer by reducing their purchasing power, it may not be long before inflation becomes a household word in the United States for the first time in a generation.

JPMorgan Chase’s (JPM) $270 million agreement to purchase Bear Stearns (BSC) failed to ease the fears sweeping financial markets Sunday evening. Stocks swooned 3% in Japan and 2% in South Korea as investors sold assets of all sorts in a bid to raise cash. Futures markets indicated U.S. stocks will open sharply lower Monday morning, in the wake of the Bear deal and the Fed’s latest effort to unlock short-term credit markets. The dollar dropped below 97 yen and gold touched $1,023 an ounce. Crude oil traded above $110 a barrel.

Bear’s failure - a sale at $2 a share, with Fed backing, amounts to little more than an orderly liquidation - will also have investors wondering what heavily leveraged financial firm will come under attack next. Two early candidates: Lehman Brothers (LEH), which fell 13% Friday, and Washington Mutual (WM), which was off 12%.

Bear Stearns’ (BSC) fire sale Sunday night didn’t calm fears about the value of the dollar. The dollar traded as low as 98 yen after Bear agreed to sell itself to JPMorgan Chase (JPM) for $2 a share, a 93% discount to Friday’s closing price, and the Federal Reserve unveiled the latest in a long line of moves aimed at easing financing terms for big institutions. The Fed cut the emergency lending rate it charges at its discount window to 3.25% from 3.5%. The Fed also created another lending facility for big investment banks to secure short-term loans - its second such move in as many weeks.

The Fed is trying to calm markets by showing it will act as the lender of last resort to a financial system in crisis. But the message isn’t comforting traders in the foreign exchange markets, who sent the dollar plunging again Sunday night after markets opened in Asia. Last week, the dollar traded below 100 yen for the first time since 1996 as the Bear crisis got under way. The question now is whether the coming week will bring a sharp drop in the value of the dollar - something Paul Krugman once termed the greenback’s Wile E. Coyote moment - that will make it difficult for the Fed to keep cutting rates as low as the 1% that some economists expect to see later this year.

The dollar sank to an all-time low against the euro and a 12-year low against the yen Thursday as investors worried about the health of the U.S. economy and the effects of the Federal Reserve’s efforts to boost liquidity. The dollar traded as low as 99.8 yen, its lowest level since 1995, while a euro fetched $1.56. The dollar has been sagging for more than five years now, but the decline has accelerated in recent months as the financial sector takes heavy losses on mortgage-related securities gone bad.

There was more dark news on that front Thursday, as Amsterdam-listed Carlyle Capital defaulted on $16.6 billion worth of debt, bringing the highly leveraged mortgage securities investor a step closer to liquidation. The prospect that Carlyle’s lenders will dump its mortgage securities portfolio on the market sent stocks tumbling overseas - shares fell 4.8% in Hong Kong and 3.3% in Tokyo, and were also lower across Europe - and could make for another nasty session Thursday for U.S. lenders such as Fannie Mae (FNM), Freddie Mac (FRE) and Washington Mutual (WM).

Oil isn’t the only commodity whose rise is setting off alarm bells. Just a week after crude oil touched $100 a barrel for the first time, gold set a record high at $876 an ounce, Bloomberg reports Tuesday. The surge comes as investors worry about slowing growth and rising inflation, a combination commonly termed stagflation but recently given other names as well. Also fueling the rise of oil and gold is the decline of the dollar, which continues to drop amid worries that the U.S. may slip into recession. The recession debate remains far from settled, though there are indications that even if the economy continues to grow modestly, things could get hairy.

Financial stocks are in free fall again. Round up the usual suspects: Fannie Mae (FNM) and Freddie Mac (FRE) were off around 8% amid the latest worries over their capital strength. E*Trade (ETFC) slid 10% as Wall Street decided a buyout of the mortgage-burdened online trader might not fly after all. Citi (C) shares fell 5% after CNBC reported Citi could cut as many as 45,000 jobs. Citi denies having decided on a layoff target but says it seeks to be “more efficient and cost effective to position our businesses in line with economic realities.” Economic realities are hammering other parts of the market as well. Banks continue to shy away from lending to one another, sending interbank interest rates such as Libor higher. The Fed, in turn, resorts to what David Merkel calls “half measures” such as a push to provide extra liquidity through year end. Merkel points out that the Fed doesn’t want to cut rates, because it would like to avoid further declines in the dollar and resulting inflation pressure, but the near panic in the market seems to suggest it won’t have much choice.

The dollar’s dizzying fall continues. The greenback dropped against the euro and yen Friday, as investors continue to flee from the U.S. economy’s declining interest rates and weakening economic fundamentals. The euro is worth almost $1.50 — up 11% for the year. Meanwhile, the yen is rising as well, causing some speculation that the yen carry trade — in which investors borrow money cheaply in yen and invest it in nations with higher interest rates — could unwind, causing a new wave of volatility. David Merkel says the dollar appears fairly valued on a purchasing power basis, but warns that it will probably be years before the dollar reaches a sustainable level against other currencies.