Could FX Trading speculators be causing devaluations of the US dollar?

Question

Could FX Trading speculators be causing devaluations of the US dollar?

Answer 1

History has proven that if you want to strengthen the dollar, you need only do the following:

1.  Reduce taxes

2.  Raise interest rates just above GDP

When globally essential commodities are priced in a weakening dollar, it only drives them up further.  Doing points 1 and 2 above would also eliminate that problem in short order.

Answer 2

I doubt it because the fundamentals in general have been supporting a weak dollar.

I personally think that the Bush administration is pursuing a weak dollar policy to help the exporters and maybe trying to curb the trade defecit.

You can value a security, but I would assume that speculation takes a larger role in fx trading, because you bring into play many more risk factors, which probably are driven through speculation.

I think that there are so many players in the FX market, that there cant be some players who can simply cause the dollar to be devalued. Unlike equities where govt. typically stays out, fx is something where  other govt also interfere.

Plus. take a look at our interest vs. the Europeans. I am of the belief that the Euro is over valued based on fundamental, but dont think that speculation is causing it.  

Answer 3

It is true that high volumes of purchases of USD will increase its value, high volumes of sales will decrease it.

However, there are so many other factors that contribute to a currency's strength - most notably current economic conditions - that nobody could ever truthfully say that "speculators cause devaluation" of any currency.

page 23 (which is actually the 21st page of this pdf file) explains some reasons why rates change.  

Answer 4

I will concur with the previous two posters, but I will add to their answers, just a little. Predominantly, Fed monetary policy is causing the current decline in value, as well as the continued issue of more and more treasuries and other Gov't backed securities, the most recent Federal gaurantee of mortgages is contributing as well. But, absolutely, FX trading can, will, and almost certainly is causing further declines. Like any individual stock, or the markets in general, much of it is inherently psychological, and any perceived and/or potential devaluation is "priced in" and there is a bandwagon effect. Any group acting and trading in the same direction can potentially have an effect on anything. I think it would be next to impossible to figure how much effect speculators are having on the dollar, though. But yes, to answer your question specifically, they could be causing, to a certain extent. Much more to the point, they are worsening, not causing.