Is The Value of the Dollar Dropping?
So is the value of the US dollar dropping? The short answer is yes. The long answer is yes yes. So does this mean for Americans, and what is the dollar actually worth? Also how is the value measured? Also what is a dollar? Let's find out.
The value of the dollar is most commonly measured in three ways. These are:
- treasury notes
- foreign-exchange reserves
- exchange rates
Exchange rates is the most common method by which the dollar is assigned a value but it's important to be familiar with all three the fully understand the situation.
It would appear that by all three measurements the US dollar has increased in value since 2011. This is due to the fact that investors tend to purchase US treasuries as a safe haven during any global crises to help mitigate risk. With the debt crisis in Greece the European Union is still working to resolve that issue which weakens demand for the euro, the worlds second go to choice for currency. That lines up with China reforming its economy and slowing its growth in 2014 further leading investors back to the American dollar. And amazingly both Japan and China continue to purchase the American dollar at a healthy rate. Doing so helps both countries decrease the cost of exports and boost volume.
It would appear that the dollar is strengthening also after a reversal in decline that began in 2002. This coupled with the end of the 2012 presidential campaign, government shutdown, and avoiding the fiscal cliff things are looking up. It would seem.
Now here's the problem. The United States owes more than $18 trillion. This tends to make foreign holders a bit nervous in fear that the Federal Reserve would allow the dollar's value to declines of the US debt repayments would be worth less. You see by decreasing the value of the dollar you increase the amount of money that the US would have to pay back as currency would be worth less than it was when the dollar was borrowed. This effectively allows the Fed the ability to decide, to some degree, how much more America's going to have to pay them for the money they loaned them. That's sort of like the ability to change the rules in the middle of the game to make sure you went. In fact it's exactly like that.
When measured by its exchange rate the dollar compares its value to other currencies. The Fed has less control over this, but still has some. Exchange rates allow the determination of how much one currency can be exchanged for another therefore allowing a relative value to be assigned. Exchange rates change all the time due to trading on the foreign exchange market. This is referred to as a Forex value.
Most countries allow their currency to write freely on the Forex market and have its value determined there. This is often referred to as a flexible exchange rate and allows investors to determine the value of the American dollar compared to the Canadian dollar, the pound, the euro, the rupee, and more.
So the fact that the dollar appears to have gotten stronger is really only due to the fact that everything else is become a little bit weaker and the dollar is the better choice in the group for foreign investors. This isn't a reflection of the strength of the dollar but that of the weakness of the other types of currency. Coupled with the fact that the Fed can get a little bit out-of-control determining who owes what where when and why is clear that the dollar has declined and will continue to do so until a disinterested third party can step in and begin assigning absolute values. At the very least we need a fair relative value assigned.