Why do you think the value of the us dollar declined against that of the euro in 2003?

Answer 1

The dollar lost 19 percent of its value against the euro during 2003 with one-fourth of this loss occurring in December. The exchange rate between the dollar and the euro is set by supply and demand. Two factors are most commonly cited as the causes of the loss in value of the dollar against the euro: interest rates and macro policies (both the trade and budget deficits). Short-term rates in the U.S. have been at 45-year lows resulting from the U.S. Federal Reserve's setting the discount rate and the Fed Funds target rate at 1 percent while comparable rates in the euro zone were 2 percent. Next, the cumulative U.S. trade deficit set an annual record during 2003 with the $489.4 billion deficit surpassing the previous record of $418 billion recorded in 2002. In addition, the deficit grew from 4 percent of GDP in 2002 to 4.5 percent in 2003. To finance the deficit, the government must attract funds domestically and/or globally. Some market participants fear the size of the deficit coupled with the low interest rates discussed above could cause financing problems