The Consequences of a Weak Dollar

United States dollars have been under pressure for the past decade. Today, the greenback is roughly at parity, or 1:1 with the Canadian dollar, which is ironically a cause for both angst and celebration north of the border. Further, $1.50 marks the exchange rate for one Euro, and is a dramatic fall from its 1999 $1.05 mark. The steady downdraft in valuations has drawn the ire of world leaders from Paris to Beijing.

Foreign Exchange

Foreign exchange transfers stores of value, internationally. Private citizens purchase imported goods with money that is eventually exchanged by merchants for their home currency. Meanwhile, all governments maintain foreign currency reserves to execute official international payments and as economic ammunition to intervene within currency markets.

"Hard" currency is preferred foreign exchange associated with stable, industrialized nations. The Yen, Euro, Canadian Dollar, and British Pound are other examples of hard currency. Despite our recent travails, the U.S. Dollar remains the world's premier hard currency as a historical tribute to its most powerful economy.

Bretton Woods and Gold Standard

Washington emerged as the world's Central Banker with the 1944 Bretton Woods Agreements. These accords called for fixed exchange rates of Western nations pegged to the U.S. Dollar. In turn, the U.S. Dollar served as international reserve currency; and was convertible into gold. Western European economies were destroyed in the aftermath of world war; and had become debtor nations to the U.S. Therefore, American leaders operated from a position of power and U.S. Dollar strength was the order of the day.

The fixed exchange rate system proved to be unsustainable over time. World gold supply could not keep pace with economic growth. Further, recovering economies bristled at U.S. Dollar dominance, and Washington began to take upon large deficits to finance the Vietnam War. The United States unilaterally abandoned Bretton Woods and the Gold Standard in 1971.

Fiat Currency

Modern era hard currency is actually fiat money, which is not backed by gold and silver. Fiat money valuations are associated with support and allegiance towards a particular government. U.S. Dollar declines signal that the international community is losing faith within American business. At home, Treasury officials are heckled with catcalls claiming that the economy and foreign exchange are being mismanaged. Leadership must strike a delicate balance between promoting economic growth and dollar stability. Yes, low interest rates and weak dollars do fuel investment and the export market.

However, informed onlookers recognize that the U.S. is now the debtor nation that cannot afford to have its creditors lose faith in regards to dollar-denominated assets. Foreigners taking to The Street(s) en masse to dump Treasury securities in retaliation for dollar weakness would reverse any progress made by Washington to correct the Great Bubble.

The Consequences of a Weak Dollar, Sources:

Kofi Bofah, What Happens when the Dollar Falls, http://www.ehow.com/how-does_5499032_happens-dollar-falls.html

X-Rates, Historical Exchange Rates Lookup, http://www.x-rates.com/cgi-bin/hlookup.cgi

Bloomberg, Benchmark Currency Rates, http://www.bloomberg.com/markets/currencies/fxc.html