What Factors Would Stop the Dollar Devaluing?

Readers Question: What would stop the falling dollar?

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The dollar has been falling for many reasons. These are some of the factors which would stop the dollar falling and lead to a recovery in the value of the dollar.

Higher Interest rates. US interest rates have been cut to 0% in an effort to stave off a US recession. This causes an outflow of hot money. If interest rates were raised it would encourage people to save in the US and cause an appreciation.

Recovery in US economy. The US fear recession because of a declining housing market, this is leading to lower interest rates and lower confidence about the US economy. If the economy recovered, interest rates would increase and people would have more confidence in buying dollars.

Fears Over the Euro. The main beneficiary of the falling dollar has been the Euro. People are increasingly seeing the Euro as an alternative reserve currency to the dollar. Therefore, investors have been switching out of the Dollar. However, confidence in the Euro may be misplaced. The Euro economy is not much stronger than the US. Many European economies face the prospect of falling house prices; also the strength of the Euro is causing problems for exporters. Arguably, the Euro is overvalued on economic fundamentals – the dollar looks cheap on purchasing power parity. Maybe the sell off of dollars has been overdone.

Improvement in US Current Account. The fastest depreciation in the dollar came when the US had a current account deficit of over 6% of GDP. However, the depreciation in the dollar is helping to improve the current account. If the current account continues to improve as domestic spending falls, the dollar should recover.

Intervention of Central Banks. So far, Central bankers have been content to leave the dollar to market forces. However, there may come a point when Central bankers think ‘enough is enough’ and they take steps to intervene in the market such as buying dollars. If there is co-operation on an international level, this may be sufficient to restore confidence in the dollar and revert its decline.

Stopping Quantitative Easing. Printing money has helped to devalue dollar by raising prospect of future inflation.

Improved US competitiveness. If US productivity improves relative to other countries this would help make US goods more attractive and increase demand for the dollar.

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1 thought on “What Factors Would Stop the Dollar Devaluing?”

  1. it seems to me that we “the usa” are printing money like the germans did afrter ww2, if we stay on this road it will take more money than we can carry to buy a loaf of bread. am i thge only one that can see this?? mik

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