What are the prospects for the U.S. dollar?

February 28th, 2008 | Category: Federal Reserve, Economic Data

Is the declining dollar just a longer cycle than we have seen before or are there fundamental global profitable forces at play, and why? How did we get to where we are now? What does the future hold? How are emerging markets like Brazil, China and India affecting the current situation?

It’s not just a longer cycle. Since January 2001, the dollar has lost 64% of its value relative to the euro. There is a conscious U.S. policy to aid companies that export and to help the oil industry - since a weaker dollar causes oil prices to rise.

How did we get to where we are now?

The mechanisms for weakening the dollar are the opposite of the ones strengthening it.

U.S. policy was to increase debt — it sits at $9.4 trillion — to cut taxes by $1.3 trillion, thus boosting the Federal Budget deficit, and to spend a huge proportion of the Federal budget on wars — $2.4 trillion worth. whether an objective credit analyst were to scrutinize the U.S. balance sheet, it would conclude that it was in not good shape - not unlike third-world countries in the late 1970s. Thus the dollar is not seen as a good store of value and it has plummeted in value.

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