If you find information off the internet please cite the website please: What is

Question

If you find information off the internet please cite the website please:

What is happening to the value of the U.S. dollar these days? What causes the value of the U.S. dollar to rise or fall? Who demands U.S. dollar? Who supplies U.S. dollar? When we purchase German products, does our demand for euro go up or down? What are freely floating exchange rates all about, and how do they work? How can the falling U.S. dollar impact your travel expenses? Why would a cheap dollar relative to other nations' currencies be good or bad for U.S. trade?

Explanation / Answer

The value of US dollar is getting stronger against most of the major currencies. In fact, since April, dollar has appreciated to its strongest level against Euro and to its highest level against Japanese Yen. The Bloomberg Dollar spot index has climbed to its highest level on November 6. This has happened first time since December 2004.

The value of US dollar rise or fall when the relative demand and supply of US dollar changes.

US dollar is demanded by those who wants to purchase goods and services from United States. Dollars are also demanded by those who wants to invest in United States. For example, a European pension fund investing in US stock market will demand US dollar to undertake such investment.

US dollar is supplied by those who wants to exchange their dollars for other foriegn currencies. For example, a US company purchasing software services from an indian firm will supply dollar to obtain Indian Rupee to make payment to Indian company.

If we purchase German products then we would require Euro to pay for these products. As we need Euros, our demand for Euro will go up.

Freely floating exchange rates refers to the exchange rates that are determined on basis of market forces of demand and supply. These exchange rates are determined taking into account the respective demand and supply of currency. No government intervention with respect to fixing up of exchange rate of currency take place in case of freely floating exchange rates. These rates work according to mechanism of demand and supply. Changes in these two forces bring changes in value of freely floating exchange rates as well.

Falling US dollar implies that one unit of dollar is now able to purchase lesser unit of foriegn currency in comparison to previous time period. When a person is visiting another country, he needs currency of that country. A US citizen visiting another country will need currency of that country. With US dollar falling, each dollar he poses will buy less units of that country's currency and thus he have to spend more to get required amount of currency of that country and thus his travel expenses will go up. So, the falling US dollar will increase our travel expenses.

If the dollar becomes cheaper relative to other nations' currencies then this implies that one unit of other nations' currencies can now buy more units of dollar. As these countries can now buy more units of dollar per unit of their currencies, their demand for US-made goods will increase and thus US-exports will increase. However, this relative cheapness of dollar vis-a-vis other nations' currencies implies that 1 unit of dollar can now buy less units of other nations' currencies and thus will make US imports expensive. So, the relative cheapness of US dollar relative to other nations' currencies is good for US trade in the sense that it will boost US exports and bad for US trade in the sense that it will make US imports expensive.

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