Thursday, February 28, 2008

Why Is the Dollar Losing Value?

Dreams of vacationing in Europe just got a lot more expensive, with the dollar falling to new lows against the euro and the British pound Wednesday after a series of negative economic reports from the United States. At one point during trading, it cost just more than $1.50 to buy one euro and nearly $2 to buy a one pound. That means an American in Paris will spend a lot more to buy a flaky croissant.
So why is the dollar plunging, and what impact does that plunge have on U.S. and world markets? Here's a look at some of the reasons for the dollar's fall, and the consequences.
Why the Weak Dollar?
There are several reasons. First, there's the difference between the interest rate in the United States currently 3 percent and interest rates maintained by central banks around the world.
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While the United States has dropped its rate, other banks have not followed. The spread between the interest rate at the European Central Bank (home of the euro) and the Federal Reserve (home of the dollar) is larger and that has weakened the value of the dollar against the euro. Put another way, you would get a better interest rate return holding a euro than a dollar.
Second, central banks around the world have been diversifying their holdings away from dollars to euros, British pounds and so on. That means there are more dollars out there in currency markets available to purchase. More dollars floating around means diminished value.

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