What Are the Causes of Devaluation of the U.S. Dollar?

The devaluation of the dollar owes itself to many causes. As a fiat currency backed by nothing more than faith, the dollar has taken the role of the world's reserve currency since World War II. Increasing deficits, inflation and a reduction in overall market confidence in the dollar can cause demand for the greenback to slide.

National Deficits

U.S. budget deficits (spending more than revenue) and trade deficits (more imports than exports) cause strong downward pressure on the exchange rate, harming the value of the dollar.

Inflation

To cover deficits, the Federal Reserve regularly prints massive amounts of currency to circulate. Such an increase in the supply of dollars causes the purchasing power of each dollar to decrease.

Sub-Prime Crisis

Declining housing markets and stock markets reduce confidence in the U.S. economy and therefore the dollar.

Lower Interest Rates

When the Federal Reserve cuts interest rates while other countries increase them, it reduces demand for the dollar by making the U.S. a less attractive place to save money.

Market Confidence

In light of all the above factors, investors diversify their investments away from the dollar when a currency falters or when other currencies, such as the yuan or euro, show strength. General market confidence dictates the demand, and therefore the worth, of the dollar.

References

• Causes of the Declining Dollar

Resources

• Ludwig von Mises Institute