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The US dollar. How valuable is it?

  • 17 страниц
  • 5 источников
  • Добавлена 17.03.2012
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Contents
Introduction
Chapter 1. The History of Dollar
Chapter 2. What makes the currency less or more valuable?
Chapter 3. How the Value of Dollar Affects the US Economy
Conclusion
References

Фрагмент для ознакомления

As more countries join or trade with the European Union, demand for the euro increases. Foreign investors are diversifying their portfolios with more non-dollar denominated assets. As the dollar loses value, investors are less likely to hold assets in dollars as they wait for the decline to stop.
The U.S. dollar is most easily measured by its exchange rate, which compares its value to other currencies. Currency exchange rates allow you to determine how much of one currency you can exchange for another. Exchange rates change every day because currencies are traded on the foreign exchange market, known as forex. A currency's forex value depends on a lot of factors, including Central Bank interest rates, the country's debt levels, and the strength of its economy. Most countries allow their currencies to be determined by the forex market. This is known as a flexible exchange rate.
Dollar Value Compared to Euro:
2011 - The dollar's value against the euro fell 10%, and then regained ground. As of October 7, 2011, the euro was worth $1.35.
2010 - The EU debt crisis strengthened the dollar. By year end, the euro was only worth $1.32.
2009 - The dollar fell 20% thanks to debt fears. By December, the euro was worth $1.43.
2008 - The dollar strengthened 22% as businesses hoarded dollars during the credit crisis. By year end, the euro was worth $1.39.
2002-2007 - The dollar fell 40% as the U.S. debt grew 60%. In 2002, a euro was worth $.87 vs $1.44 by December 2007. (Source: Federal Reserve Bank, Exchange Rates)
The dollar is held by foreign governments who have an excess of dollars, which they hold in foreign currency reserves. The excess happens when countries, such as Japan and China, export more than they import. As the dollar declines, the value of their reserves also decline. As a result, they are less willing to hold dollars in reserve. They diversify into other currencies, such as the euro or even the Chinese Yuan. This reduces demand for the dollar, putting further downward pressure on its value. Some experts fear that Japan's 2011 earthquake will force it to sell its dollar reserves, which it holds as Treasuries, to pay for reconstruction from the disaster.
When the dollar declines, it makes U.S. produced goods cheaper and more competitive when compared to foreign produced goods. This helps increase U.S. exports, boosting economic growth. However, it also leads to higher oil prices in the summer, since oil is priced in dollars. Whenever the dollar declines, oil producing countries raise the price of oil to maintain profit margins in their local currency.
The growing U.S. debt weighs in the back of the minds of foreign investors. That's why they may continue to gradually move out of dollar-denominated investments - slowly, so they don't diminish the value of their existing holdings. The best protection for an individual investor is a well-diversified portfolio that includes foreign mutual funds.
Reduce the US current account deficit. It should also reduce the Chinese current account surplus. This some may help reduce some of the economic imbalances in the global economy.
Countries which export a lot to the US may witness a fall in economic growth. The Chinese government is worrying about this situation. It is one reason why they are trying to prevent the Yuan appreciating too much.
The impact of devaluation depends upon the elasticity of demand for exports and imports. If demand is relatively inelastic then an increase in the price of imports may not reduce the value very much. If this is the case, the impact of a devaluing dollar will be limited.
The US dollar weakness reflects growing pessimism over the US economy and the stress financial markets are under. This has sparked fears of poor stock market performance and lower returns on dollar assets, says CIMB Economic Research.
The broad-based dollar weakness is a reflection of investors’ growing pessimism that the US economy is sinking into a deep recession and that the financial market remains under considerable stress, which would lead to disappointing stock market performance as well as lower returns on dollar assets.
Heightened uncertainties and increased risk aversion have caused a widespread re-pricing of risks and increased volatility in both the financial and foreign exchange markets.
The dollar depreciation decelerated in September and early October last year following the Fed’s decision to slash interest rates by 50 basis points to 4.75% on Sept 18, 2007.
The dollar lost more traction, hitting a record low of 1.58 against the euro and a 12-year low against the yen after cumulative cuts of 200 basis points in the Fed funds rate to 2.25% by March.
Adding to the selling pressure on the greenback was the financial crisis.
It is not the direction but the speed of the dollar’s decline that matters. A gradual decline is fine as it would give the US economy some breathing space to make the necessary adjustments. But a free fall of the dollar within a short period could have far-reaching implications for the US economy in particular and for the world economy in general through exchange rates, capital flows and trade.

Conclusion
The United States dollar, denoted by USD or the symbol $, is the official currency used in the United States. Commonly referred to as the "American dollar," the currency is divided into 100 cents (symbol ¢). A further division includes 1,000 mills to a dollar, though this division is largely unknown to the general public and only sometimes used in matters of tax levies.
The dollar is considered the standard unit of currency in commodity markets across the globe (namely gold and oil). At the present time, the U.S. dollar remains the world's foremost reserve currency, primarily held in 0 denominations. The majority of U.S. notes are actually held outside the United States. According to economist Paul Samuelson, the overseas demand for dollars allows the United States to maintain persistent trade deficits without causing the value of the currency to depreciate and the flow of trade to readjust.
The decision of whether you should buy or sell dollars depends on the conditions of the economy. If the economic conditions are favorable, it will lure investment from all over the world due to obvious safety and higher rate of return obtainable on investment. Investors always look for the higher predictable yield from wherever they invest. Due to the investment from abroad, the capital account becomes stronger and consequently the demand for dollar increases. The flow of dollars outside the country occurs as a result of increased consumption of goods and services, which is due to the import of goods and services from the other countries. If imports are more than exports, it will result in trade deficit. If a country attracts foreign capital from another country, it can overcome its trade deficit.
In conclusion the US economy is affecting us all, for better or for worse individually and globally. All people getting salaried in US dollars are losing because the value of their money has decreased drastically in addition to it continuing to decrease. But on the other side of the story people getting paid in other currencies are gaining because their funds are worth more globally. Overall people are winning and losing from this decline of the US dollars value.
At the end of the day, many people will be asking whether they can retire with just one million dollars. It is absolutely probable but the principles of living that one million dollars can buy will fall with each passing year. I would bet that one million dollars would not be adequate in another 10 years time. So be prepared and do your sums right.

References
Devis, Kenneth C. Don’t know much about history: everything you need to know about American history (bet never learned)/Kenneth C. Devis. Printed in the U.S.A. 1996
Between the dollar-sterling gold points. Exchange rates, parity, and market behavior. – Cambridge University Press, 1996. – 363 pages.
The Value of a Dollar: Prices and Incomes in the United States: 1860-2009. By Scott Derks. Publisher: Grey House Publishing; 4 edition, 2009. – 690 pages.
http://onemilliondollarsonly.com/2009/09/how-much-is-one-million-dollars-worth-nowadays/
http://EzineArticles.com/?expert=John_Mussi









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References
1.Devis, Kenneth C. Don’t know much about history: everything you need to know about American history (bet never learned)/Kenneth C. Devis. Printed in the U.S.A. 1996
2.Between the dollar-sterling gold points. Exchange rates, parity, and market behavior. – Cambridge University Press, 1996. – 363 pages.
3.The Value of a Dollar: Prices and Incomes in the United States: 1860-2009. By Scott Derks. Publisher: Grey House Publishing; 4 edition, 2009. – 690 pages.
4.http://onemilliondollarsonly.com/2009/09/how-much-is-one-million-dollars-worth-nowadays/
5.http://EzineArticles.com/?expert=John_Mussi

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