Shane H
 |
Honestly, most of the answers here are crap.
The US Dollar, like most other modern currencies, is called a Fiat Currency. That means that there is nothing "backing" the dollar. Not too long ago, the paper in your hand was a representation of gold or silver held in a vault somewhere. Today, it's just paper.
Currencies today are traded, held, and sold, just like stocks, oil, gold, and other commodities. If somebody is holding a large amount of US Dollars--the central bank of a foreign country, for example--decides to sell them off quickly, the same thing happens as when someone sells of ANY commodity quickly: The market is flooded and the value drops.
So it becomes psychological: What makes people sell off their holdings of US Dollars? It could be a number of things. People sell stock in companies all the time, and it's not just because those companies are poorly managed.
I know this isn't a neat and tidy answer, but it's the truth.
Now, the government has some influence over the market, and yes, the current Administration has chosen a Weak Dollar policy.
This is where it's good to ask the question: So what? The dollar is weak, so what? What's the problem with that? IS that even a problem at all?
Well, for us in the middle class who want to travel abroad, it does hurt, a lot. But what if you're General Motors? All of a sudden your cars are far more affordable for those in Europe or Canada. If you're in that position, you LOVE the weak dollar.
A couple more thoughts..
The weak dollar does not directly affect oil prices because the global oil market is traded in US Dollars. It's been speculated that one day the Euro may take the place of the dollar, but that's not an easy transition.
Furthermore, it doesn't much affect our second-largest trading partner (china) because the Chinese Yuan is pegged by the Chinese Gov't to rise and fall in correlation with the Dollar. That is, when the dollar goes down, the Yuan follows.
All the rest of the reasons people give -- balance of trade, etc -- are red herrings. The only thing that investors NEED to know to invest in a currency is that it's going to be around in the future and that it's not going to be devalued (see: Russian Ruble, Mexican Peso). In those terms, the USD is stable.
It's all economic. BushCo says "we're going to cut policies designed by Clinton to strengthen the US Dollar" as an investor holding a billions of USD, you can decide to sell off now (imagine this happening back in 2001). So you sell your USDs and buy Euro's. Other investors do, too. Over 6, 7 years the USD falls. Another administration is coming soon, so you see speculators thinking that the USD will reboudn... so they sell they euro's and buy USD's. With each trade, the USD increases in value and, if they're selling Euros to buy USDs, the Euro decreases in value a bit.
Compounding that, when the value gets too low, people see that as a buying opportunity. That is, it's likely to raise again, so you might as well buy now. Likewise, when the Euro or CAD increases too high, people get nervous and they're not likely to buy-in to those currencies at their peaks.
Above all in market dynamics is equality. If a value drops too low, the markets shift and it increases. If it gets too high, the markets shift and it drops.
EDIT:
Whoever said the Euro has always been more valuable than the USD is just wrong. This isn't opinion, this is historic fact. Look it up next time. |
Warren W- a Mormon engineer
|
Bush has trashed the dollar by printing so much new money since he has been in office. There is no new program, just about, that he won't fund.
All the money we collect, almost, in income taxes goes to pay the national debt. The rest is borrowed. This borrowed money is the problem. More dollars chasing the same amount of goods and services. That is why gold is so high. The dollar goes in the toilet, and so gold is a safe haven and always has been.
Europe is living on a false economy, and there is no real explanation why the Euro is doing so well. It is all fiat money, anyway. Nothing backs it but the promises of dying regimes. |
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