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.