Why has the dollar fallen so much and so quickly vs. the Euro and other currencies? 2 years ago a euro could be bought for $.89, not its about $1.30, about a 45% swing.
My background is purely academic (college Economics degree) but my guess would be the budget deficit increases in the USA, Mad Cow disease scare on US beef exports, and Bush’s War on Terrorism and its affects on US foreign policy. Many other countries’ governments are more suspicious of the US now. Hence the financial markets are putting more faith in the Euro, increasing its price vs. the dollar. You could write a book on this (and people probably have), I’m sure others will come up with other compelling reasons.
Three things come to mind:
Low interest rates in the U.S. have caused people to switch their money from dollars to Euros in order to earn higher returns.
The Euro has become an alternate reserve currency. For many years, people in countries with unreliable currencies kept dollars as a way of saving. Now that the Euro is well established, some of those dollars are being switched to Euros.
The American trade deficit. For decades Americans have imported more than they export. The difference was made up because foreigners were willing to invest in U.S. stocks and bonds. It appears that they are less willing to do so now. As a consequence, there are more dollars chasing fewer Euros.
The magnitude of the movement is still a mystery, however.
The only 100% factual answer to your question is “I don’t know.” Ask Alan Greenspan and the assembled brains of the international monetary policy profs in all top 10 B-schools, and if they’re in an honest mood they’ll say the same thing.
All the stuff in the replies above are pretty good guesses, though, but you have to take them for what they’re worth: just two posters’ opinions. I don’t mean to rain on the parade, I’m just providing some perspective. You’ll get the same answer if you ask why any one company’s stock fell or rose on any given day.
It’s also much weaker to the Canadian dollar that it used to be. I can get 0.78 US cents to the dollar. Not long ago it was at 66.
The reason I’m seeing is the war in Iraq. But that doesn’t help Canada. US isn’t trading with us as much, since our dollar is so much higher. Plus, more Canadians are going on vacation to the States for the winter because of the strong dollar. Sucks to be the underdog in a strong position I guess.
The magnitude of the movement goes unexplained I think. Anyone have an idea of just how much Soros is making of the latest swing?
The massive trade deficit of the United States is larger than the Euro countries, and the United States trade deficit is expected to only get worse.
Any country that spends more than it makes, will end up with a devalued currency. If several countries do this, then it is relative. The United States is planning on relying on China for most of its manufactured goods in the future, more so than any other Euro country, so its currency will get devalued more than others.
Interest rates do have an effect, but only if all other factors are more or less equal. Interest rates dont matter too much if you lose your principle.
If you have any country, and in this case the United States, who is deliberately intending on not being a “producer” in the future with its massive shift of its manufacturing capabilities to asia, then its currency will fall in value as more and more investors realize that the United States will be a net consumer from now on, and will have few manufactured goods to export.
But outsourcing to third-world countries is nothing new, while the dollar loss is only recent. It is not a simple answer.
[nitpick]
SmackFu, China is a second-world country and not a third-world.
[/nitpick]
What are the implications for the US stock market? Initially, one would think that a weak dollar wouldbe bad for the stock market (lower dividends in euros). Now, it seems that foreign investors are getting into US stocks (as the weak dollar enables them to buy shares cheaper).
I read many Arab and Muslim countries are switching some of their reserves to Euros as a diversification strategy and also for anti-American ideological reasons. That increases demand for Euros and decreases demand for USD.
And I have heard that the euro is overvalued at the moment, though whether that’s “overvalued against the dollar” or “overvalued based on other economic criteria” I don’t know.