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?
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There are a large number of questions here. Let me briefly answer each in turn.
- What is happening to the value of the U.S. dollar these days?
The dollar has been getting stronger against most currencies lately. For example, an index that tracks the strength of the dollar against six other major currencies has risen by 15% in the last half year or so.
- What causes the value of the U.S. dollar to rise or fall?
The main factor that causes the value of the dollar to rise or fall is the relative level of demand for the dollar. The value of the dollar rises when foreigners want more dollars. I will discuss this further in the next question.
- Who demands U.S. dollar?
US dollars are demanded by anyone who wants to buy any goods or services in or from the United States. For example, if Japanese companies want to buy American wheat, they have to buy American dollars to pay for that wheat. If the Chinese government wants to buy American government securities, they have to buy dollars to do so.
- Who supplies U.S. dollar?
US dollars are supplied by American companies that sell dollars to foreigners. They are also supplied by American companies that use dollars to buy foreign currencies. For example, if an American company buys electronics parts from China, they have to give dollars to buy yuan. This increases the supply of dollars.
- When we purchase German products, does our demand for euro go up or down?
Our demand for the euro goes up in this case because we need to buy euros to pay for the German products.
- What are freely floating exchange rates all about, and how do they work?
A freely floating exchange rate is one that is allowed to rise and fall as dictated by the forces of supply and demand. A government that lets its currency float does not try to control its value. These exchange rates work through supply and demand.
- How can the falling U.S. dollar impact your travel expenses?
The US dollar is not falling right now. However, if it were, your travel expenses (assuming you are going to a foreign country) would rise. You would need to use your dollars to buy the currency of the country you were visiting. If the dollar gets weaker, each of your dollars buys less of the foreign currency and you have to spend more dollars to get the currency you need.
- Why would a cheap dollar relative to other nations' currencies be good or bad for U.S. trade?
A cheap dollar would be good for US exports and bad for US imports. A cheap dollar hurts when we import for the same reason given in the previous question. A weak dollar buys less of the currencies that we need to buy to pay for our imports. A cheap dollar helps our exports because it makes it easier for foreigners to buy dollars to use to buy our exports. This will make foreigners more likely to buy our goods.
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