The Decline of the "Almighty Dollar"

Extended copy of current SIFE Sense article as seen in the Etownian

Perusing the financial news has become a depressing activity for many lately, as the Dow Jones Industrial Average has plummeted over the past couple months, mirroring the woes of the economy as a whole. These difficulties have been compounded by the subprime mortgage lending crisis, which has contributed to a dramatic decrease in the stock prices of banks and other financial institutions, as well as the skyrocketing price of oil. The continuing slump has not passed without affecting the exchange rate of the U.S. dollar, as the demand for U.S. goods and services has diminished as our economy has dwindled.

As of August 5, both the British pound and the Euro held significant advantages over our dollar, with the Euro’s value at $1.56 and the exchange rate for the pound at $1.95. There are several factors influencing this slackening, including a decline in consumer confidence and spending within the U.S., a decrease in trust in the U.S. currency within foreign markets, increased trade between major world economic players and the European Union nations, and diminished foreign investment in U.S. interests stemming from unease regarding a possible recession. This has raised some suspicion from financial analysts that ultimately the Euro may become preferred over our dollar amongst global central banks, exacerbating its decline and creating further economic woes for the U.S.

The U.S. trade deficit is a widely recognized malady, indicating that the volume of our imports has since the 1970s (and more markedly since 1997) exceeded that of exports of domestic goods. This lack of foreign purchasing has also contributed to our government’s budget deficit, spurring them to finance some of our debt with bonds in foreign economies. These and other difficulties have piqued the concerns of foreign investors and governments, contributing to the diminished confidence in our currency.

Despite these woes, there are indications that the dollar may not be in as great of jeopardy as commonly assumed. The yield rates on treasury bonds are typically inversely correlated with the value of the dollar, meaning that as the dollar value declines, the yield rate should increase. However, throughout the past six years this has not been the case, as the yield rate has actually decreased contrary to what is to be expected with a decline in the dollar’s value. Unfortunately for our currency, this phenomenon is considered a secondary indicator when compared to the exchange rate.

With the present mortgage crisis and economic pressure stemming from the value of oil, the dollar value may seem like a secondary concern. However, it is critical to remember that its worth is reflective of the clout of our economy on the global scale and affects our ability to import from other economies. The declining value relative to the Euro may be indicative of the increasing economic power of the European Union member nations and the comparative waning of American industry.

SOURCES AND ADDITIONAL RESOURCES:

www.x-rates.com (exchange rate tabulator)

http://www.msnbc.msn.com/id/21018869/ (Article: Should we be worried about the falling dollar?; Sunday, Sept. 30, 2007)

http://useconomy.about.com/od/tradepolicy/p/Dollar_Value.htm (Article: Value of the U.S. Dollar)