These are some previous entries about why the dollar is falling
- Reasons for the Fall in the US dollar
- When will the dollar stop falling?
- The Effects of a devaluation of the dollar
Throughout the year I have posted a few times on the prospects of the US dollar, the prospects for 2008 don't look much better. These are various reasons why the dollar is likely to remain weak in 2008
- Recession in the Housing Market. The problems in the US housing market is threatening to reduce consumer spending and push the US economy closer to recession. This is why the FED recently cut interest rates by 0.5%. However, by cutting interest rates the dollar is further weakened. (Less demand for holding assets in the dollar - less hot money flows)
- Current Account Deficit Still Big. Although the US current account deficit has fallen a little, it is still close to 6% of GDP. This puts downward pressure on the dollar because more currency is leaving rather than entering.
- Less Confidence in the Dollar. The problem is that the more the dollar falls, the less confidence people have. Therefore, foreign investors are increasingly looking to diversity out of dollar holdings and into other currencies.
- Twin Deficit
As well as a current account deficit the US has a large budget deficit. This has been boosting consumption and demand for imports, but, it has not been used for investment purposes
- American Goods are becoming very cheap. European and Japanese exports are becoming more expensive.
- The US is not the only country to have a large current account deficit
- A slowdown in the economy will reduce consumer spending on imports, combined with the devaluation the current account deficit is likely to fall.