Thursday, July 12, 2007

Reasons for the Fall in the US Dollar

The fall in the dollar Continues. It has reached a new low of 1.39 US$ to a Euro.
Against the £, the dollar has fallen to $2.03

Reasons for Fall in the US Dollar.

  1. Large Current Account Deficit:
    This means that there is a net outflow of foreign currency. US imports are greater than exports. This outflow of currency puts downward pressure on the dollar. People are selling dollars to buy Chinese goods.

  2. Fall in Demand for US Securities.
    In the past the US current account deficit has been financed by capital inflows. Basically, the US has been importing goods, but China has been using its foreign exchange reserves to buy US debt - mostly government debt. This means that the capital inflows kept the dollar higher than it would have been. However, Asian countries are now starting to diversify away from the dollar. The dollar is no longer seen as the best investment, due to weaknesses in the US economy.

  3. Housing Market Slump

    The US housing market has suffered a severe reverse. Mortgage arreas have increased due to problems in the sub-prime market. Why the Roof fell in on the US housing Market

    Problems in the US housing market are causing lower growth and discouraging foreign investors from buying dollars.

  4. Fall In confidence

    For many years the dollar was seen as the world's leading currency. The US economy was the undoubted superpower. However, there has been a shift in people's perceptions. Factors such as the Iraq war and the rise of China have indicated US hegemony will not last forever. Therefore, people are no longer willing to buy dollars for such a low return.

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