The U.S. Dollar (America, holiday)

[Rex]

Any ideas on why the U.S. Dollar is so week.

With the Euro you get what $0.75 for every $1.00 (u.s.) you convert.

That is terrible.

[Mr Spinkles]

It's because the rate of inflation of the U.S. dollar has declined a great deal, while the Euro us experiencing a higher rate of inflation.

In many ways, this is actually beneficial for the U.S. It really hurts Europe's tourism industry as Americans will feel less inclined to visit Europe if everything is so much more expensive.

[Alaric]

No Spink, inflation is about the same both places, and a low inflation rate would tend to strengthen the dollar, not weaken it (high inflation is indicative of high money supply, meaning each dollar is worth less). The weak dollar just means that demand for US dollars is low compared to demand for Euro, which can be caused by many things - people don't want to invest in the US (noone needs $US to invest in America), or the US government is willfully devaluating of the currency to increase exports (you still have a trade deficit of $560 bn!). A weak dollar is shouldn't really be seen as bad, unless you want to holiday (or invest) in Europe.

[Bastet]

It's not just Europe affected by a low US dollar. The Aussie dollar is back around 70 cents US as of yesterday. While it's good for us as tourists visiting the US (which can be really expensive when you lose half your dosh in the conversion), it's not so good for tourists coming this way, or for our exports. I don't think it'll hurt the US any though...

[Mr Spinkles]

Alaric--

Hey I know you're a business guy, could you explain this a little further? I'm trying to understand where I went wrong here. Doesn't low demand for U.S. dollars mean more supply, which means higher inflation relative to Europe (each dollar is worth less)? Should I have said the U.S. is experiencing high inflation, rather than Europe?

I thought the word "inflation" meant any raises in the supply or lowering of the demand of money, making the money worth less. I'm guessing this is where I'm going wrong.

[Alaric]

I can see what you mean, but inflation is just the rise in the price level, which can be caused by increases in the money supply, but also by a fast-growing economy. So inflation can cause depretiation against other currencies like you just said, but only if it's the result of an increase in money supply.

I think the main reasons for the low value of the dollar are the trade deficit and the low interest rates. Americans are importing more than they are exporting, so they give dollars to foreigners, or trade them away for the necessary foreign currency. The low interest rates mean that noone wants to keep their dollars, and trade them for other currencies. Thus, low demand.