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Old 02-18-2004, 04:49 PM   #1
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The Dollar

http://news.bbc.co.uk/1/hi/business/3303549.stm

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The dollar has hit a series of historic lows against just about every currency. But the reasons behind the falls are not obvious. BBC News Online explains.

How low has the dollar fallen?

It's breaking all sorts of records.

The pound is way out in front, and is currently at an 11-year high.

The euro boasts an all-time high, but it has only existed since 1999; elsewhere in Europe, the Swiss franc is at its strongest since 1996, and the Swedish krona and Norwegian kronor have hit post-1997 highs.

The yen, meanwhile, held in check by Japan's central bank, can only manage a 41-month high, touching levels last seen in late 2000.

The euro, the currency that everyone seems to be watching most closely, has now gained 16.5% against the dollar this year alone, and fully 45% since its historic low of 84 US cents in July 2001.

What's behind all this?

The US economy is pretty perky at the moment, growing by more than 8% at the last count.

But this has produced a curious effect.

As US growth outpaces the global average, its consumers pull in ever more imports, and the country needs to borrow to finance the trade and current-account deficits that result.

Globally, goods and services flow into the US, while cash flows out, producing a constant pressure on the value of the greenback.

US interest rates are at a 45-year low of 1%, scarcely a great lure for the international flows of capital that govern exchange rates.

And Washington's once-ironclad commitment to a strong dollar seems to have waned, perhaps because politicians realise that America stands to gain from having a weaker currency.

What have the effects been?

The value of the dollar plays an absolutely central role in the global economy.

Oddly perhaps, the US suffers least of all. Although its rampant consumers will find it harder to slake their thirst for imports, its companies will become far more competitive, reaping profits and boosting jobs.

Meanwhile exporters in Europe and Asia have found it harder to sell their products into the US market.

American tourists, the free-spending mainstay of many a European or Asian resort, will venture out in far smaller numbers this year.

International companies will suffer uncertainty and complicated book-keeping.

And because commodities such as metals and crops are traded in dollars, their prices may have to rise; gold and oil have both boomed as the dollar fell.

Is there an upside?

Not much of one.

Shopping in New York may be a more affordable option - although not necessarily, if you are planning to buy Japanese-made electronics or European toys.

More broadly, companies will find it cheaper to invest in the US.

Shares might be a worrying purchase for some right now, but a big corporate acquisition in the US could be reasonable value under the right conditions.

Can the dollar go much lower?

Most people seem to think so.

The general consensus is that the pressure on the dollar will persist: although the declining dollar has hit the headlines this week, the factors behind it are long-term, structural issues that are not going to go away.

In time, of course, Europe and Japan - the two main zones of slow economic growth - will pick up speed, and the imbalance between the US and the rest of the world could start to be corrected.

But that could take years.

In the meantime, the question must be whether rich countries will take action to prop up the dollar, as they did in 2000 in support of the euro.

Options this time around are limited, however: interest rates in Europe and especially Japan are unlikely to fall much further, and there does not generally seem to be the sort of global consensus needed to coordinate efforts.

The dollar seems likely to fall: betting just how far is one of the best ways imaginable to lose even more money.
So.... we import more foreign goods, and have to spend more to pay the price... but how does this lower the dollar??

Less interest rates .. good for taking loans, bad for savings..

more expensive to travel!

Can anyone explain all of this to me in layman's terms? Why it happens? Could it be a serious problem beyond costing travellers more?

Thanks,
Olive
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Old 02-18-2004, 05:44 PM   #2
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http://www.exchangerate.com/cgi-imag...39&country=238
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Old 02-18-2004, 05:58 PM   #3
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Re: The Dollar

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Originally posted by oliveu2cm
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So.... we import more foreign goods, and have to spend more to pay the price... but how does this lower the dollar??

Less interest rates .. good for taking loans, bad for savings..

more expensive to travel!

Can anyone explain all of this to me in layman's terms? Why it happens? Could it be a serious problem beyond costing travellers more?

Thanks,
Olive
OMG, this is exactly what we're doing in macroecon right now.... I won't try to explain b/c there's probably smarter people here who've taken higher level Econ than I have...
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Old 02-18-2004, 07:52 PM   #4
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the dollar moves based on trading on the foreign exchange market. Whether you buy stuff or not will not affect the dollar. It will move based on things like economic data such as jobless rate or gross domestic product. All these data work in tandem to help traders judge the health of a country's economy.

the reason the dollar is being affected now has to do with the fact that people have less confidence in the US economy -- mainly because of the large deficit we have ($7,000,000,000,000 as of now I believe). So people are not looking favorably on the US markets and are selling dollars and buying euros.

Is that clearer? [I'm not sure it is]
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Old 02-18-2004, 07:57 PM   #5
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Re: Re: The Dollar

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Originally posted by LivLuvAndBootlegMusic
OMG, this is exactly what we're doing in macroecon right now.... I won't try to explain b/c there's probably smarter people here who've taken higher level Econ than I have...
Go ahead and give us the details. It's been too many years since I took macroecon...
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Old 02-18-2004, 08:01 PM   #6
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The combination of low interest rates and heavy government spending have been contributing to currency deflation. The only short-term solutions are for the government to stop borrowing money or for it to raise interest rates.

Theoretically, currency deflation is good for U.S. exports, as it makes our exports cheaper abroad, and, again theoretically, should boost our economy. On the flip side, of course, imports are more expensive, and, with the Euro and the pound so high right now, it discourages American investment into their economies.

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Old 02-18-2004, 08:09 PM   #7
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Theoretically, currency deflation is good for U.S. exports, as it makes our exports cheaper abroad, and, again theoretically, should boost our economy. On the flip side, of course, imports are more expensive, and, with the Euro and the pound so high right now, it discourages American investment into their economies.
And we have a trade deficit -- that means we are paying for more goods to come in than selling the goods that go out. Also, really not good.
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Old 02-18-2004, 09:30 PM   #8
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Re: Re: Re: The Dollar

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Originally posted by nbcrusader


Go ahead and give us the details. It's been too many years since I took macroecon...
actually, there's quite a difference between what I should know and what I do know

*studies*
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Old 02-18-2004, 10:19 PM   #9
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Blame Clinton!!! Blame Clinton!!!!...NO wait...let me think...


Blame Bush....Blame Bush!!!!!!!


He's gonna be sooooooo screwed if this subsists through October.
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Old 02-19-2004, 02:23 AM   #10
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The US govt could theoretically raise the dollars value if they realy want to. They could be buying more US curency or printing less US dollars. Esentially the govt of any country can control its dollar but the effects, depending on their export/import situation and other factors, can be detremental.

For us in Canada this has been really bad for us, as we export more then we import, most of what we export is raw materials and we import goods. But for us as tourist to the US it is great as our dollar goes a hell of alot further then it used to. Our dollar has been sitting around the .75 - .79 Us dollar range.
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Old 02-19-2004, 09:26 AM   #11
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Quote:
Originally posted by sharky


And we have a trade deficit -- that means we are paying for more goods to come in than selling the goods that go out. Also, really not good.
ahhhh!

Thanks Sharky your explanation did help! I don't know a lot about economics (it confuses me for some reason) so this has helped.

So, another question.... did anything like this happen before the big stock market crash? (i.e. does the weak dollar increase the chance of something like that happening again?)
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Old 02-19-2004, 10:49 AM   #12
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Originally posted by sharky
And we have a trade deficit -- that means we are paying for more goods to come in than selling the goods that go out. Also, really not good.
Actually, I believe a trade deficit is when you are importing more goods than you are exporting. A weak dollar makes US goods "cheaper", theoretically increasing the export of US goods.
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Old 02-19-2004, 02:01 PM   #13
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right, but we still have more coming in than going out, mainly due to all the manufacturing jobs overseas but that's for a different thread.

as for controlling it, the Bush admin. doesn't want to control the dollar thinking the market will take care of it. they definitely could though. Last year, the Japanes government bought and sold dollars and yen to control their currency.
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