What causes the dollar to drop in value?

Answer 1

source Yahoo answers:

The US dollar- not the can dollar- is falling for a combination of 3 reasons, all else equal:

1. RELATIVE interest rates are falling

2. RELATIVE productivity is slower

3. RELATIVE attractivness of US investments is declining.

The dollar will increase for 3 reasons all else equal:

1. Raise RELATIVE interest rates

2. Increase RELATIVE productivity

3. increase the RELATIVE attractivness of US investments.

Each of these things increase demand for dollars, which in turn increases the value.

Your question implies that the decreased value of the dollar is a bad thing. Nothing could be further from the truth- at least for the US. There are huge imbalances in the US economy (i.e., trade balance, savings rate, consumption) that have to be corrected eventually and a devalued dollar encourages these corrections. In addition, the worsening credit crunch and real estate woes are costing jobs and decreasing economic output. These declines are being offest- at least in part- by greater exports and foreign capital investment that would not occur if the dollar hadn't sunk to its current level. In addition, the cheap dollar is bringing in foreign investment into real estate, which is helping to stabilize- or at least mitigating the drop- real estate values.