Dollar Value
By Cixx Admin Date Posted.. 2009-09-22 18:39:45
Views (2206)

 When we talk about the US dollar value, we are typically talking about two things:

1. The purchasing power of the dollar and how that purchasing power changes in a specific economy (the United States) over time and therefore affects the dollar value.
2. The value of the dollar relative to other global currencies.

The change in the relative purchasing power of a dollar in the United States is measured and reported each year by changes in the Consumer Price Index (CPI). Another way of referring to these changes is inflation (or in some cases deflation).

In our increasingly global economy, the value of the US dollar is measured continuously by comparing changes in the dollar value to other currency. For example, once can measure the value of the dollar vs. the Japanese Yen, or the European Euro over time. The dollar value as it compares to other currencies is reflected in the exchange rate. The exchange rate is simply the rate at which you can trade or convert one currency (the US dollar, for example) for another currency (Japanese Yen, for example). Historically, the dollar value has remained relatively stable and could be considered a strong currency because it maintained a high value relative to other currencies. In recent years, however, we have seen some significant declines in the dollar value vs. other global currencies. This has been caused by a number of factors, including the US National Debt, the annual US deficit, the trade imbalances that have been increasing in favor of other exporting countries over time, etc.

As dollar values decline relative to other global currencies, U.S. produced goods become cheaper and more competitive when compared to goods and services produced by foreign countries. This has a positive effect on US firms who are exporting goods to other countries. However, it also increases the prices of goods being shipped in to the US. As US dollar values decline relative to other currencies, so does their purchasing power. In other words, US consumers are able to buy fewer and fewer of the now relatively more expensive foreign produced goods with our weakening dollars. The price increases of products imported from foreign countries also results in higher inflation.

These trends in the dollar value relative to other currencies have created a substantially weaker dollar over the past several decades. In fact, during period between 2000 and 2007, the value of the US dollar declined by about 40% vs. the European Euro.

It is important to note that in the last few years (late 2008 and early 2009), this trend of a weakening dollar value has reversed itself to a point. As the global economy has begun to sink deeper and deeper into an economic recession, investors are increasingly drawn to the US dollar as a safe haven for their investment portfolios. The United States, and hence the US dollar is still perceived to have long term staying power even when compared to other substantial and historically strong and stable economies and currencies such as those of the European Union and Japan.

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