The Declining Dollar
According to Mann (2004), the high growth in Japanese, European, and other markets around the world, especially during the late 1990s and early 2000s, led to a fall in the demand for U.S. exports. This is, of course, an important reason why the country is experiencing current account and trade deficits. What is more, the U.S. dollar was appreciating through the late 1990s to 2001. This made U.S. exports more expensive, thereby further augmenting the current account imbalance (Mann).
Declining value of the U.S. dollar means that a country importing U.S. goods would find these goods cheaper than before. The euro happens to be a major competitor of the U.S. dollar. In recent years, as the dollar weakened, the euro was strengthened, making it difficult for Europeans to export their products (Dettmer, 2004). Furthermore, this acted as a deterrant to U.S. imports from Europe, helping the current account balance by reducing American spending on foreign goods and services. At the same time, a strong euro means that there will be more investors in the world willing to invest in the euro as compared to the U.S. dollar. As a matter of fact, the euro is a significant reason for the reduced demand of the U.S. dollar in recent years.
Along with its declining dollar, the United States has been experiencing a low level of interest rates, naturally reducing the appeal of investing in the dollar “at a time when the United States desperately needs to attract growing sums of overseas investment” (Dettmer). The low level of interest rates is actually one of the reasons behind the decreased demand for the U.S. dollar that led to the depreciation of the currency. Still, as mentioned before, this makes U.S. exports cheaper to other countries. The United States may hope to reduce its current account deficit and trade deficit through the decline of the dollar, for it is obvious that making U.S. goods and services cheaper to foreign importers may very well increase the demand of U.S. goods and services, thereby fueling the growth of the U.S. economy.
Dettmer, J. (2004, Feb 2). Bernanke’s Allusion Weakens the Dollar. Insight on the News.
Retrieved Apr 5, 2009, from http://findarticles.com/p/articles/mi_m1571/is_2004_Feb_2/ai_112723174.
Mann, C. L. (2004, Jul). Managing exchange rates: achievement of global re-balancing or
evidence of global co-dependency? The United States and its trading partners have serious vested interests in the status quo. Business Economics. Retrieved Apr 5, 2009, from http://findarticles.com/p/articles/mi_m1094/is_3_39/ai_n6206021.