Discuss the reasons for the recent weakness of the US Dollar - Essay Example

It still rules as the de facto world currency. Foreign Exchange market is liquid where investors and players participate freely. Its daily turnover in 2004 as per the Bank of International settlements was reported to be$1.9 trillion. London was the biggest foreign exchange market followed by New York “Somewhere between 40 to 60 percent of international financial transactions are dominated in dollars. For decades the dollar has also been the world’s principal reserve currency. In 1996, the dollar accounted for approximately two thirds of the world’s foreign exchange reserves” (255) writes Robert Gilpin in his ‘Global Political Economy: Understanding Economic Order (2001) The exchange rate of dollar against many currencies in the world has fallen down leading to depreciation of dollar value exchange rate of euro, yen and Indian rupee from January 2007 to June 2007 shown below.. Dollar depreciated by 9% against Indian rupee, and by 1.

2% Rate against euro The dollar-pound exchange rate that was settled at 0.6 to 0.64 in 1999 is set at 1.999 in July 2007 i.e. dollar has depreciated by 217% against sterling pound in the same period from 1999 t0 2007 July. Apart from the introduction of Euro in 1999 that squeezed the strength of dollar the Iraqi war turned to be dampener for US dollar. The heavy burden on US economy for fighting the war had an adverse impact on the domestic prices and psychology of other nations. The value of dollar is very much indirectly proportional to gold price in the international market.

The following table shows gold price has raised by 135% over 1999 prices. This is one of the principal reasons for dollar price depreciation. The dollar deprecated by 25% against euro from the level of one in 1999 to 0.744 in July 2007. The acute adverse balance of trade and burgeoning debt of America added fuel to the fire. The America’s balance of payment is highly critical. There is a persistent