Econ 500.................?

Question

OK,
Advanced econ question.
What makes the dollar go down?
Unemployment is low.
US is borrowing lots of money.
Our interest rates are low. Compaired to the world.
So how does that mash into lower dollar?

Answer 1

High interest rates have people buying your currency, lower rates they tend to sell it. The US currency is a solid currency used world wide as a reserve currency, as gold and silver bullion would have been used in the past.

But as good as it is if it is allowed to go down in value too much people begin to sell for fear it will fall further (yes like a commodity held for asset value).

Our inflation is too high, the government is pumping billions of dollars into circulation to help forestall the credit crisis you've read about.

And the Fed is concerned that inter-bank borrowing is not working properly.

So what you ask? Well, to fix and smooth the credit crisis the Fed's maneuver is to lower interest rates. But to correct the really growing inflation problem (7-8% in food, fuel increases, water going up) it should raise the interest rate. The Fed has opted to smooth the admittedly serious credit crisis at the expense of inflation.

And at the expense of the value of the dollar on world markets. The European Unions Treichet (the EU version of the Chairman of the Central Bank) has criticized the dollars rapid slide quite succinctly and justifiably since with a rapidly lower dollar European exports suffer, our exports brighten.) Its like we are attacking and doing battle in a very real and tangible way. It was the suddeness of the drop that got the attention, currencies go all over the place.

Hope I helped, and I apologize if I haven't.

Answer 2

Two reasons. Other countries are not finding enough US goods they need cheap enough to buybut US consumers find non-Us goods cheap enough to import and consume. So th demand for UD dollars is less than the supply of US dollars and the US is running huge and rising trade deficit and current account deficit. When demand for dollars is less tha supply of dollars to buy goods and services from abroad by US, the dollar value would fall.
Second, even if the US economy is currently in good shape, there is strong international perception - rightly or wrongly, that the US will go into a recession, income and unemployment will fall and returns from investment in USA will decline. So, international investors ar shifting from holdings of dollar assets to other international assets. This causes the dollar value to fall. Perceptions about future impact exchange rates in international markets.
But the falling value of dollar itself is seeding the inputs for strengthening the value of dollar in future. DDollar depreciation will help reduce the growth of US imports and help increase US exports. We have to wait and see over the next 2 to 3 years. USA is a strong and large economy: it can withstand negative perceptions and even a ecession better than other countries.