A little debate over a dinner led to a little easy research. Can dogs smell when they are on the run? And when they are exhaling?
All dog owners know how much dogs rely on scent and hearing over vision. Both their range of color vision, and their acuity, are poor, compared to humans. The link demonstrates examples of dog vision.
The sense of smell - the olfactory sense - is a genetically ancient chemoreceptive modality, and the only one which is not modulated by the midbrain - its sensory nerves go direct from the olfactory bulb to the cortex. Smell is a minor function of the nose (see nose physiology), but we couldn't taste much without it - smell is the major component of taste (as you may recall, the mouth, really only the tongue can only detect salt, sour, bitter, sweet - and umami, the last which I do not recall learning about). The dog's nerve "wiring" from the olfactory bulb to the brain is far heavier than that of humans - here: http://www.macalester.edu/~psych/whathap/UBNRP/Smell/nasal.html - click on link from dog to human to compare the olfactory nerves. Plus the dog has 25 times more chemoreceptors. Thus the dog can not only smell things that we cannot, his olfactory acuity is far higher than ours - ie, he can detect and discriminate multiple odors, when we tend to only detect a dominant odor, or a blend. It is said that the dog can sense odors one miion times more sensitively than humans (but of course breeds vary, and older dogs seem to lose sensitivity, just as humans do). Thus when a dog goes outdoors and raises his nose and sniffs the air, he is taking in a great deal of information.
When a dog sniffs, he is filling his olfactory area with chemical-laden air, for maximum smelling power. But even when he is not deliberately sniffing, his olfactory powers are strong. But, back to the beginning. Yes, he can smell while running, and even when exhaling. The Bernoullie effect - the same pressure gradient that helps provide lift to airplanes - draws air up in the dog's olfactory region (Click here: Entrez PubMed) to wash over his olfactory receptors, so he doesn't have to stop and take a deep sniff. Makes good sense for running hunters. So, with his powers, why does he have to stick his nose into turds and dead animals and other dogs' butts? Who knows. Shouldn't be necessary. It must be a deep sensual pleasure.
(FYI, the RCA-Victor dog "Nipper" was a bull terrier-fox terrier mix, from Bristol, England.)