Economists: How do you explain the fall of the US$'s value against the Euro and Canadian $.??

Question

What kinds of things cause the dollar's value to fall in the international markets? Does it have a lot to do with our national debt and the war? Imbalance of trade?

Answer 1

Let me try to clean up these answers into a coherent picture.

First of all, the value of the dollar is determined by how desirable it is. The supply of dollars, in the short term, is essentially fixed.

So anything that makes our dollars less desirable means the value of the dollar falls. Consider trade: when we buy more goods abroad, the demand for foreign currency rises, which means the demand for US dollars falls. That certainly has happened. Our nation no longer makes manufactured consumer goods.

The 'imbalance of trade' just means that we import more goods. But how are we paying for it? We are selling our capital goods: and our promises to pay for goods in the future (either through stockpiles of physical or intangible assets, including dollars, stocks, bonds, corporate ownership).

Private household debt has been rising. As a nation, we are a net borrower from abroad.

Also, when the US government has to borrow to cover the deficit, it has to go abroad since we don't save enough anymore.

Also, concerns about the economy come in two forms:

1) If people worry that the US could no longer finance its deficit it will have to print more money. However, if it does that, inflation will rise, and the value of the dollar will fall. If people expect the dollar will fall, they will no longer want it now.

2) On the other hand, if the US prints too little money, high interest rates will stall the US economy, again putting doubt about its financial position. This is confounded by the fact that the US must keep interest rates high to attract foreign capital in order to finance it's trade, consumer and government deficits.

Answer 2

The world has shrunk and both Europe and Asia have emerged as major players in the global market place. If you own an HP computer-give tech help a call, and guess where you calls are answered? correct-India. When some European countries tried to unify and simplify their currencies under the Euro, it was believed that it would strengthen their economy over the USD-which it did for quite some time. The Japanese Yen and before Hong Kong was surrendered back to mainland China, the Won were making headway. Mean while, American companies were already in China and Japan well before the market explosion in that region. Boeing Aircraft has been in China since the mid 70'S, and is Boeing's largest customer. See everything is inter dependent on the world market. The market never closes. Just keep track of what happens in the Asian and European market, and you can almost predict what will happen on the NYSE the same day

Answer 3

The US is printing more money to cover the cost of the military expenses. So the national debt is increasing rapidly which makes the currency worth less (hopefully not to the point of worthless...).

Additionally, the mortgage crisis in the US is a lot larger than it looks. Everyone is trying to say it's not as bad; but it is. The smarter US banks sold the 'bad' mortgages to financial institutions world wide. Well, with the sub-prime collapse, the money just vaporized. It also vaporized overseas. Oops. The Central Banks in Europe and Asia stated dumping money into the system to stop the worldwide collapse. The US Fed just pumped in "temporary" support just on Friday (8/10/07) to stop the collapse of the stock market.

Are we good to go or is this just a temporary fix?

If you know the answer to that question, you would either be buying a lot of stocks or selling a lot of stocks short...

Answer 4

Actually the first person had it correct. the currency increase or decrease based off how much its printing is backed by how much it has in gold. before the centralized banking system which are for fathers never wanted happened, your dollar bill stated it is redeemable for 1 dollar. now its a legal tender.. its just paper.. we are printing and spending more money then we can back with the gold we have. not to mention that the us is in debt for each dollar it gets. the federal reserve is a private instituation. its not federal. we get charged interest for each dollar that is given to the us from them so when we get there money, we already have interest.. so really the system is designed for the us to always be in debt. So as we spend all these hundreds of billions on the war, we take from the federal reserve it is a loan from them with interest.. and they dont have as much in gold to back up as much as we are taking for the war so our dollar drops in value.

Answer 5

supply and demand account for all market moves, more $ around than the other currencies, it has something to do with what behind the value of the currency ex. used to be backed by gold, now its just a promissory note from the Treasury and our Treasury is a reflection of our economy, which in turn dictates interest rates higher or lower, the countries that offer the highest return for their currency in relation to the supply of that currency is a major factor. its a real mess for most

Answer 6

supposedly, the mortgage disaster, which has also hurt financial institutions and investors has led to a loss of confidence in the american economy...

the trade and fiscal deficit doesnt look too hot either, as americans are importing more than it is selling off, but at least it fosters increased consumption by foreign tourists capitalizing on the cheap exchange rate

Answer 7

As far as I know, Greece is not on default yet and Spain is way far from default. I don't know where did you get the idea that the Euro is collapsing.

Answer 8

because the U.S. happens to have ballooning debt loads thanks to the on going Iraqi war.Meanwhile the government just keeps on borrowing money from itself just to finance the war effort.