Simple question?
Ask any three economists and you will get four different answers.
This question is better suited to GD because I seriously doubt you will find a single, factual answer.
I think most economists would agree that a country’s currency declines as the capital leaving the country exceeds the capital entering the country.
As a gross simplification - the US trade deficit and budget deficit represent money leaving the US. Foreign investors purchasing government debt (T-bills) represent money coming into the US. Japan and China are big players here. The catch here is that purchasing US debt is attractive only as long as it appears the debt can be repaid. The larger the deficits becom, the more doubtful it appears that future generations of taxpayers will be able to repay it. Nobody wants to lend money that won’t be repaid, so demand for T-bills falls. That’s less money coming into the country, without any more money entering the country, so viola… falling dollar.
The reason the fall isn’t worse is that Japan and China both depend heavily on US imports. If the dollar falls, their exports become more expensive for US consumers to purchase. It’s something of a co-dependent relationship - they must keep enabling the US to feed its spending addiction so that the US can continue to purchase their goods.
I’m sure someone can offer more nuance, but I don’t think anyone would disagree that in the big picture, the dollar is falling because of excessive US spending.
If China and Japan must keep lending us money, thus propping up the value of the dollar somewhat, is that an advantage to US investors who could invest overseas?
I don’t see how this situation is favorable for anyone. It’s a purely defensive play for all parties concerned. The US has to reform its spending habits - both government and personal - otherwise a collapse is all but inevitable.
But again, I am not an economist. Was hoping someone would come and give a better accounting than I.
Or excessive US consumption, not matched by wealth-creation. In other words, US citizens and the govt are living beyong their means, owing to too much borrowing and spending by plain folks (mortgages, credit cards, etc) and a budget deficit (govt).
OTOH, the US economy is extremely vibrant and can rectify the imbalance if it tightens its belt a bit - tax increases/spending cuts (govt) and less spending/more saving (plain folks, spurred by increases in interest rates). If the markets didn’t feel the US economy has natural underlying strength vis-a-vis the rest of the world, the dollar would have seriously plunged by now, which it hasn’t. And probably won’t. You might be more profligate than the rest of the world, but you’re also harder-working and more productive.
(Aside: I’m surprised US policymakers don’t spell out to the US people the link between US dollar weakness and high gas prices - an easy-to-understand equation which would bring home some simple truths to everyone.)
Well, it started on a Sunday morning when its wife ran off with a Filipino peso. Then its dog died and somebody stole its truck. Things just went downhill from there, really.
And for a nitpick - while the dollar is low right now, it is not at an all-time low. For example, in 1900, £1 = $4.87, while today it is more like £1=$1.80. Or for a more recent example, in 1995, the Yen dropped down to ¥85 =$1, while right now it is ¥105=$1.
Good point, but isn’t that at least partly down to the pound being devalued, rather than the dollar rising as such?
(from Wikipedia)
The pound’s devaluation also led to other currencies being devalued, so I suppose you could argue that the dollar effectively got stronger, but it’s not quite the same thing, is it?
The GQ answer is that this is the price at which there are an equal number of buyers to sellers. Why this is the price will have to go to GD.
I don’t know the answer, but I can tell you that those of us who had the foresight (translated: dumb luck) to buy a quantity of gold at $265/oz. back in 2001 as a hedge against the administration’s fiscal policies are now laughing all the way to the bank at $420/oz.
On the other hand, I lost my job a few months ago… 
Obviously this is a complex macro-economic question, but one factor that I haven’t seen mentioned yet is the rise of the euro for international trade and for currency and investment reserves.
One of the reasons for the historical strength of the U.S. dollar in the post-WWII world it was the currency seen as the most stable. People involved with other countries often would enter into trade and other contracts with prices and payments denominated in dollars to avoid the risks of fluctuations in the local currency. Likewise, people would frequently invest in U.S. or U.S. dollar denominated securities (and indeed hold U.S. currency) to avoid currency valuation risks (and to pay off dollar denominated contracts). This all created strong demand for U.S. dollars.
With the introduction of the euro and its stability through its first several years, many people are using the it for trade and investment purposes as an alternate to the U.S. dollar (or at least diversifying their holdings). Further, with an alternate strong currency available, currency users are more freely able to reduce their dependence on the U.S. dollar due to currency risks caused by the U.S. trade deficit, budget deficit and political concerns.
The Bush administration.
Simple answer?
Here’s the formula:
Close down most of your factories; import all the stuff you used to make; export nothing but the empty cartons and scrap metal. I’m not kidding about the waste paper and scrap metal. I work in foreign trade and I see what comes and goes.
Take what little manufacturing you have left and devote it to supporting a half a trillion dollar national security state, i.e., the defense dept, most of the energy dept, the homeland security dept, and the various intelligence services and there you go.
Borrow the money to support the state apparatus above from the countries that you bought the goods from. That’s how the money comes back-with interest, of course.
Jack up the price of homes. Double the amount of income which goes to service mortgage debt. Don’t worry, the Japanese and Chinese will buy the Ginnie Maes and other mortgage instruments. They have plenty of dollars.
The people who formerly had decent jobs in manufacturing or directly supported by manufacturing are now working in crappy jobs paying eight bucks an hour or less. They have a hard time making ends meet after paying the mortgage and so they put it on the tab. The plastic tab, that is. Where do you suppose the credit card companies get money to expand the balooning credit card debt of America. Why they dip into the big pool of money everyone else does. The pool which is increasingly not owned by their fellow citizens.
How’s that for a good start to a financial meltdown.
And yes, it can only go on because the dollar is not the peso or the ruble or the yen. It is the reserve currency for most of the world and when it goes, it takes everything down with it. That is why the rest of the world cannot allow the dollar to go down the tubes. If that were not the case, it would already have happened.
It is hard to see how this situation has a happy ending.