US dollars depreciation?

Question

just last year, 1 pound was = 1.5 us dollars. and now its $2. 1 euro was about 1.01 US dollars, now its almost 1.5 us dollars. and the canadian dollars is almost 1:1 ratio. the US dollars is keep going down every month. whats wrong? is that mean the US economy is going down?

Answer 1

US dollars depreciation? Yes, and here is why:

1) The growth of the economy. Think about a bucket being the US economy. If more and more dollars are being put into the bucket, while the same time the bucket (economy) is getting bigger and bigger (growing) then you have more money, but the money is chasing more and more goods and services (that is, the economy: goods and services is growing). No inflation, no devaluation in the dollar. However, if more and more dollars are being dumped into the bucket and the bucket is shrinking, then you have more dollars chasing less and less goods and services, and you will have inflation or the devaluation in the dollar. Who pumps money into an economy, well in the case of the US it could be the Fed, who are always printing money and injecting it into the economy, it could be some foreign nation who has a ton of dollar reserves, that country could decide to start spending that money here in the US, that is, they would be pumping dollars into the US economy.

2) the Fed, see above, that is, the more and more money the Fed prints via the Treasury, and pumps into the economy can cause inflation, a devaluation in the dollar, depending on how much the economy is expanding or contracting.

3) The current account and trade deficits, when current account deficits and trade deficit increase, that means the economy is taking in more money from foreigners and more products from foreigners, which is not good for the dollar. Means you are consuming more than you are building, means you are spending more overseas than you are investing.

4) Interest rates, generally, the higher the Fed’s interest rates, more foreign investment. Foreign investors want the highest return, so the higher your interest rates are the more foreign investment you attract. That foreign investment must be converted to dollars, which would support the dollar.

5) And it is a biggy, confidence. If foreigners or Americans lose faith in the almighty dollar, that is bad and the dollar will decline. Are Americans losing faith, if you don’t think so, then you must ask yourself how come Americans are putting so much more money via mutual funds into foreign assets and stock markets than they are they own? Furthermore, who are the biggest buyers of US Treasuries, it used to be Americans, now it is foreigners.

What is the almighty dollar backed by? The full FAITH and CREDIT of the US government. That ain’t much backing the dollar when you think about it.

To summarize:

The US economy is growing less and less, the Fed is pumping more and more dollars into the economy, the current account deficits and trade deficits are huge, the Fed is cutting interest rates, and confidence in the dollar is eroding. Those are the main reasons the Canadian dollar now buys 1.03 dollars, a 31 year high and remember, just a few months ago, the Canadian dollar only bought 0.8 US dollar.

Answer 2

It means that American exports are cheaper and now more attractive to foreign consumers. That's a good thing. Many foreign governments hold their savings in US dollar assets ... they are are now worth less than before. That is a good thing ... they are not about to dump their US dollar based assets at a huge loss. Foreign economists are not too happy about their strengthened currencies vs. the US dollar. It gives America a competitive advantage in the export markets and holds their assets hostage ... they can not be used as leverage for political gain.

There have been many whacks at the dollars value over the decades ... it always rebounds because investors (both foreign and domestic) know that in the long run, the dollar is backed by the USA government ... the strongest nation on the earth.

Answer 3

Long-term dollar depreciation is due to various factors. \
1) The debt held by foreigners has gotten so large that some of them might prefer to hold other currencies.
2) U.S. imports vastly exceed exports. Like the first, more dollars leave than come in so foreigners are holding more dollars than they are comfortable with and start to reduce their holdings. When more agents want to sell something, the price of that something goes down.
3) When interest rates are reduced to stimulate the local U.S. economy, foreigners find that they can get better returns on their money in other places. This, again, reduces the demand for dollar investments. Likewise, the U.S. equity and real estate markets might be viewed as less attractive than alternative investments elsewhere ( in other currencies ) so that foreigners are, again, motivated to reduce their dollar holdings.
4) The continuing and large budget deficits require that more debt be issued and that much of that be bought by foreigners. This provides another reason that foreigners might find they are holding more dollar-denominated assets than they wish.

Actually, it does generally mean a weakening of the economic strength of the U.S. economy.

Answer 4

The US dollar is based on debt these days. Not just on the money that we owe, but it depends on a constant stream of new money coming in, new debt being sold. If China and Japan and the UK decided suddenly that we weren't worth lending money to, they wouldn't have to call in their debt, they'd only have to decide to stop lending us NEW money, and we'd be sunk. We'd have a huge recession and hyperinflation like Argentina did.

As it is, we are borrowing more and more money at an unprecedented rate. We have no plan to stop this, and apparently no intention. Our creditors see this complete lack of responsibility and they aren't as happy to keep lending us more money.

Unless we can get it together, pull our socks up and make some unpleasant choices, the default situation will be for us to have a big round of inflation. This will cancel some of the debt because we'll be paying it back in smaller dollars.

President Bush, of course, like President Reagan did before him, pretends that debt just doesn't matter. The Republicans have completely abdicated their position as the party of fiscal responsibility. Bush knows that he'll be out of office when the bill comes due, and party opinion-makers will blame it on Democrats or 'liberals'. Just as they blame Jimmy Carter for the double-digit inflation that resulted from the oil 'shocks' of the early 70s and the debt from the Vietnam War.