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View Full Version : Economics 101 Question: Re Devaluing of the Dollar




wgadget
01-11-2008, 06:17 PM
If the dollar continues to go down in value, will all of the foreign countries that we support start demanding MORE of them? Or will they retain their value to foreign countries and only lose value to us here in America?

mokkan88
01-11-2008, 06:23 PM
They will lose value in other countries as well. This is why other countries are beginning to look into more stable currencies.

slantedview
01-11-2008, 06:26 PM
to add to this - china holds a LOT of dollars, and were they to suddenly dump them in favor of something else, it would probably cause the dollar to crash immediately. in fact, they've somewhat threatened to do this just recently. now how's that for a national security threat - china could singlehandedly bring our economy to its knees any time it wants.

the main thing stopping them is that it's obviously not in their best interest (economically) to see the US economy go down the tubes, for now.

bluemarkets
01-11-2008, 06:45 PM
take a look at the EUR/USD for the last 2 years 2006 - 2008 (Euro vs. Dollar)

The dollar has basically lost 25% over the past 2 years, so if you have any plans to go to europe everything there will now cost that much more as the dollar continues to decline...

http://img209.imageshack.us/my.php?image=eurodollarss1.jpg

Ron2Win
01-11-2008, 06:47 PM
They will just dump the currency and go for another one.

AceNZ
01-11-2008, 06:54 PM
When the dollar is devalued, it means that it's worth less. When that happens:

1. A constant amount of a foreign currency can buy more dollars (one Canadian dollar can buy more US dollars) -- so the foreign currencies are "stronger", while the US dollar is "weaker"
2. Imported goods cost more (including things like oil)
3. Exported goods cost less to overseas buyers, so more goods are exported
4. Foreign holders of US dollars see the value of their holdings decline, which motivates them to use their holdings to either buy their native currency or to buy USD-based assets, like stocks or real estate
5. There are feedback loops in the above -- so more expensive imports will eventually work their way through the system and cause more expensive exports

So to answer the original question, the dollars that we send overseas are worth less than they used to be worth when they are used to buy things that aren't from the US. Foreign aid recipients might request larger loans, or more readily default on existing loans, since the dollars they had before won't go as far as they used to.

MoneyWhereMyMouthIs2
01-11-2008, 07:49 PM
If the dollar continues to go down in value, will all of the foreign countries that we support start demanding MORE of them? Or will they retain their value to foreign countries and only lose value to us here in America?

They gain and lose value on a world market. Their world value (same as domestic) would have mattered much less to us 50 years ago. Try buying something at Wal-Mart that isn't imported. Many of our consumer goods are imported. So, our currencey having less value compared to other currencies affects us very much at the moment.

This is also why people talk about oil being sold in dollars. When Iran sold oil in dollars, everyone needed to buy dollars to buy oil. More demand for dollars causes the value of the dollar to rise relative to other currencies. Less demand causes a similar fall.
You should ask that question in the economic issues forum down below. That's where the bright economic minds (not me) are.