[Zygote]

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Sorry for the super-noob question... but why exactly is the dollar falling?


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supply and demand. This is the rule that sets and adjusts all prices.

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ve read from multiple sources that the dollar has been falling due to both the (1) growing trade deficit and (2) increasing federal budget deficits.

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these numbers aren't fully directly correlated with the currency moves per se. Deficits can be deceiving too if you dont keep track of the income accounts and societal credit.

In general though, if you ship out more wealth than you take in, your country is slowly losing the underlying wealth. This means bond holders are taking increasingly greater risk since there is less wealth to support the stability of the currency.

If the federal government goes broke they will need to raise taxes, cause hyperinflation, and/or increase interest rates. All of them, except for the last option, dont fare well for the country's wealth or growth prospects which will have negative impacts on the economy and therefore the currency.

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But I am having trouble understanding why the dollar would fall.


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Supply and demand. If the buyers of dollars outweigh those who sell dollars, the price will rise because all available quantities for sale at a given price will have been eaten up and exchanged by the buyers leaving wave of buyers now standing by a higher bid price. If you reverse this from sellers to buyers the effect will be the same but on the downside.

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If a nation prints off a lot of currency, I understand that the inflation rate will rise and a currency will be worth less as its purchasing power decreases. I also understand how political upheaval would cause a currency's value to change depending on whether the incoming government is perceived as fiscally responsible. But these don't apply to the U.S., do they?

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Why not? The US has printed a ton of money and printed more money to monetize their debt. Future interest payments on foreign debt are going to take up all federal revenues within not much more than couple decades. They are also printing tons of money too keep their bubbled economy afloat with a variety of bailouts. The fiscal outlook has serious problems within every category, most specifically now is the entitlement problems though.

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Is the dollar falling (in part) because of people's lack of confidence in the U.S. government to pay off its debts? (which are mainly in treasury bonds, correct?)


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The dollar falls because people's lack of confidence aren't being compensated by high enough yields. When the dollar rebounds it will be because higher interest rates encourage savings for the dollar.

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How much of the falling dollar due to group psychology? (e.g., 'omg I heard the dollar is falling so I should put all my money in Euros' and the dollar slides further.)


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There is way more dollar buying for political reasons, like china, then there is people getting out of the dollar for no good reason other than their mental state. The general psychology does have an effect, but this psychology is by no means irrational. Currencies like the dollar can't make significant moves due to minor irrational psychological trends unless motivated by political forces. There just isn't enough irrational money out there to support that and the flooding of irrational money will cause significant buys.