Why Dollar has been Declining in Value since 2001

The dollar has been falling for various reasons including:

1. Decline in US Competitiveness. US has been losing comparative advantage and becoming more uncompetitive especially in manufacturing industries such as automobile industry. Therefore, there is relatively less demand for the US Dollar.
2. Current Account Deficit. Consumer spending has been rising. This has been financed by a lower savings ratio and higher borrowing. Therefore Americans have increased the demand for imports this causes increased supply of dollars. In recent years it has become more difficult for the US to finance the current account deficit through capital flows. Therefore, the depreciating dollar becomes inevitable. US Current account deficit reached 6.5% GDP in 2006, it is now just under 5%.
3. Investors less willing to buy US Securities. The US was once the strongest economy. But, increasingly people are becoming more sceptical about the state of the US economy - large national debt, subprime mortgage crisis, credit crunch, recession. Also the Euro offers an alternative for Central Banks to hold their foreign reserves.
4. Interest rates in the US have been lower than Europe. Therefore, there is less demand for hot money flows. Because US interest rates are lower.
5. Political Problems make US dollar less attractive. E.g. Iran wants to price oil reserves in Euros.

Why has Dollar has recovered in past few months?

Hedge funds have been selling investments in emerging economies. There is a fear of a meltdown in emerging economies like Hungary, Argentina, India. Therefore, hedge funds have sold these investments and withdrawn money from these vulnerable economies. The result has been an appreciation in the dollar because the investment trusts

• Forecasts for dollar