Why is the dollar declining in value?

Answer 1

Like many processes in economics, it is a matter of supply and demand. For quite some time, the Federal Reserve has been printing more faster than the growth of the US economy. Most of this oversuppy of dollars has been sent abroad as Americans have bought more goods and services from non-Americans than the other way around. The non-U.S. holders of US dollars have to do one of three things with them: 1. Buy US investments such as real estate or corporations 2. Hold on to the dollars (mainly in the form of US Treasury securities) and take currency risk 3. Buy other foreign currencies or gold and other precious metals to get rid of them. Over the past 30 years, the large non-US holders of dollars (always Japan with China becoming a larger force in recent years) have pretty much done alternatives 1 and 2. But with the busts in the US Stock Market and real estate market in this decade, alternative 1 has become significantly less attractive. Alternative 2 is becoming less attractive since these dollar holders feel they have all they want. Thus alternative 3 is becoming the course of choice over the past few years. Although the euro, yen, Canadian and Australian dollars have benefitted from this trend, the real winners have been gold and other precious metals. These metals have more than doubled over the past couple of year. As long as the Fed continues to print an overabundance of money (which they are doing by lowering interest rates) and the demand for the dollar declines, non-US currencies and precious metals will do well.