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Reasons and consequences of the fall of the dollar

"Reasons and Consequences of the Fall of the Dollar"

The value of the US Dollar has since the beginning of March

this year fallen drastically. Economists and investors worldwide

have tried to explain the cause of this all-time low of the

American currency. The consequences of the fall are many and

complicated. I will in the following outline the main reasons of

the fall, and also try to state a few of the consequences.

The first, most obvious reason for the fall, is Bill Clintons

$20 billion plan to help Mexico's economy, which hasn't seemed to

help at all. Investors' faith in the Dollar immediately diminished,

and Dollars were put on the market in huge quantities, resulting in

prices going down.

The Mexico incident, is though, only the top of the iceberg. The

Dollar has been decreasing since 1985. This trend has been a direct

consequence of the Plaza agreement, which involved agreement between

leading industrial countries to force the Dollar down. This, and

the fact that the Americans always have had a problem with current

account deficit, have had a negative effect on the Dollar.

Another reason why the Dollar has had a steep negative gradient,

is that USA has been supplying the market with more Dollars than

demanded, naturally decreasing Dollar value. This trend has been a

consequence of the pension and mutual fonds investing in overseas

equities and bonds.

The consequences of the last months fall, are many. One of the

biggest, will be the increased US export. Foreign investors do not

want to miss a chance like this one, so they buy American products,

in Dollars, at bargain prices. Especially the Japanese have proven

this prediction right. Furthermore, a quite serious consequence of

the record-breaking low, is the crack of the European exchange-rate

mechanism (ERM), which is beyond the scope of this paper *and my

Knowledge) to explain.

Important to the Deutch-mark, is the transfer in faith from the

Dollar to the D-Mark, since the Dollar has proven itself

untrustworthy. Many speculate, that the D-Mark now is going to be

the new favorite currency of the world.

The Dow Jones has been affected directly by the decrease of the

Dollar. Peoples investment of money, has switched from currencies

to stocks, thereby increasing the Dow Jones, reaching an all-time

high yesterday.

To the average consumer, the fall in the Dollar, has meant several

changes. One is that German tourists can now pay 20% less in D-Mark

for a hotel room in Florida. Another is that UK tourist have to pay

relatively more to go to mainland Europe on vacation, as opposed to

going to the States.

An essential question now seems to be: What can be done? It

seems that the States most likely have asked themselves this

question, but aren't really dealing with the problem. The most

obvious step towards raising the Dollar, would be increasing the

interest rates, making the American market more interesting, for

profit-seekers, but the interest rate have remained stable during

the turbulence of the Dollar, showing that the States maybe are

happy about the situation. One explanation is that the low Dollar

(as mentioned) stimulates export.

In my opinion, heavy measures should be taken to increase the

value of the Dollar. During the fall, both the Yen and the Mark

have gained strength, and seeing that there is not much chance the

neither will fall, the Americans are digging their own grave by not

dealing with the problem. It will be hard foreign, as well as

domestic investors, to regain faith in the Dollar.

Jens Schriver

601 words

Source: Essay UK - http://www.essay.uk.com/coursework/reasons-and-consequences-of-the-fall-of-the-dollar.php



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