What are the historic problems that have caused our dollar to be so weak ?

Question

What are the historic problems that have caused our dollar to be so weak ?

Answer 1

There are a number of conditions that cause currency exchange rates to vary.  

One significant factor to consider is that after the Federal Reserve under Paul Volker spiked interest rates in the early 80s, inflation was killed and kept under control for two decades.  This allowed interest rates to drop to very low levels and led to one of the largest periods of economic expansion the world has ever seen.  Because of the tremendous growth that the US saw during the 80s and 90s, the dollar became very strong against most other currencies and was, by many accounts, overvalued by the 2000s.  Some would argue that the declines that the dollar has seen over the past few years are simply correcting that overvalued condition.

Now we have a weak economy, low interest rates that make it hard to attract capital, and a huge trade deficit that causes capital to flow out of the US.  

In my opinion, the US needs the dollar to remain weak to provide us the opportunity to reestablish some balance of trade.  This will help our economy recover and eventually lead to capital flows coming back to the US.

Simultaneously though, the weaker dollar is causing inflation, since it takes more dollars to buy foreign goods.  Even if you buy American products, the manufacturers of those products have some flexibility to raise prices, since the prices of competing foreign goods are rising.

The weak dollar is also one of the major factors contributing to the rise in the price of oil and other global commodities.

Answer 2

This sounds like a question that is on your homework... if so you should take the answer out of your book since that is probably what your teacher is looking for.

If not, the first place I would look is a budget deficit.  A weak dollar can also be caused by less-than-robust demand for dollars, so if the economies of other countries aren't doing so well, they will buy less American goods and will therefore need less dollars to do so.  This causes American goods to be cheaper (in terms of the other country's currency)

Answer 3

Good to point out "historic" - the dollar has been on a depreciating trend since the mid-1980s, generally because of our heavy reliance on imported goods that has meant a constant trade deficit.

Also, that our government has run a fairly consistent budget deficit doesn't help. However, most national governments run in the red, so if we're comparing the value of one currency with a budget deficit to another currency with a budget deficit, it should be a wash.

Until recently (past three or four years), a major contributor was the investing preferences of our major trading partner, China. Chinese investors have been notoriously conservative - understandable in a nation where making money on the stock market can get one arrested. The preference of most Chinese businesses and investors has been for U.S. Treasury assets. These are safe (so long as the US exists, the Treasuries will be paid on), stable and provide a decent rate of return relative to risk. And they're a great place to sink dollars received from exporting Chinese goods.

Answer 4

from italy

The main historic problem that have caused the weakness of the dollar is that the US economy is very weak.

After the bubble of the house's market the government didn't know how to make the growth of economy going on and so decided to make the dollar weak to rise the export.

From historical point of view the weakness of the dollar can be seen as a general weakness of western world economies and that'is a problem that forecasts a big change in the world's economy. i think the capitalistic model is over