U.S. Dollar, Which Is Heavily

¶ … U.S. dollar, which is heavily in news these days. Every newspaper has something to offer as its take on weakening U.S. dollar. We selected an article from the Birmingham Post, which gives some solid reasons for the strengthening of sterling and weakening of U.S. dollar.

In the recent past, actually not even the past but quite lately, U.S. dollar has been facing stiff competition from both Euro and pound sterling. While the latter two are consistently on the rise, dollar is consistently falling. Is that bad news? In the pure economic sense, it is. A weak dollar means that the currency has been unable to compete with powerful currencies like Euro in the foreign markets. There can be many reasons for the weakening of a currency or strengthening of another. One main reason is the demand for the currency. As with all commodities in the world, demand is directly connected with value of the currency as well. If there are more people making transactions in U.S. dollars, then the demand for dollar increases in markets around the world. As the result of this, dollar gains value in comparison to other currencies. But this is a more specific reason for the fall or rise. Most often than not, currency values are closely tied to economic conditions at home. If there is too much inflation and per capita income is shrinking, this can affect the strength of any currency. How other countries react to a currency is also very important. When foreign currency reserves in other countries are made in Euro or pound sterling instead of dollar, this can hurt dollar value.

In this article many reasons are cited for the weakening of U.S. dollar. The author maintains that since UK interest rates are rising while U.S. is witnessing a flagging economy; this has translated into rise of sterling and Euro. The second important reason according to the author is sluggish U.S. housing market, which might not allow Federal Reserve to cut interest rates. The connection between interest rates and economy is complicated but critical. When interest rates rise, borrowing money from the bank becomes rather difficult. In order to improve the economic conditions, countries would often cut interest rates as to facilitate more borrowing. This can result in better economic activity and put a halt on downward spiral. However U.S. dollar is suffering because many industries within the country are not exactly performing as well as they were expected to before the beginning of this quarter. As the result of this, government cannot raise interest rates and may need to halt interest rates where they are. While lower interest rates allow borrowing, higher interest rates may actually serve those better who have already invested in bonds and securities. But if U.S. cannot move interest rates around for fear of further halting economic activity then dollar is in constant danger of doing further down.

So the main question that arises here is this: whether a weak dollar is really bad for the economic health of the country? As easy as it may be to say yes, the answer is actually quite tricky. In more ways than one, a weak currency may actually serve larger trade interests of a country. When dollar is weak, it means more units of it can be bought for some other currency. This also means that U.S. products become cheaper for foreign buyers. This automatically attracts people to U.S. exports and thus allows U.S. exports to compete freely with some of the best products in the world. This leads to an increased interest in U.S. exports and thus a better U.S. economy on the whole. The exact opposite happens when U.S. dollar rises against other currencies. The answer to weak dollar question is this: when a currency loses some value against a major currency, initially at least there is no real cause for concern. However if the value continues to fall, it can spell disaster for the economic health of the country.