The value of the US Dollar is a key factor of the financial positioning of many countries in the world, America being among them. The USD is part of the fiat currency, which means that the government has considered it as legal tender. In a fiat currency structure, a physical good does not support money. Instead, it gets its worth from its comparative shortage and the worth its consumers relate it with. A government declaration sets the preliminary worth of the fiat currency.
Fiat money structures have no confines to the quantity of cash that can be manufactured. The consequence is a speedy increment of credit accessible. There is an increase in spending and business margins, making it appear primarily like there is a lively fiscal growth. In the long run, the economy is affected negatively by the subsequent reduction.
Fiat money, also known as paper money, has had a catastrophic past. From the time when it was introduced by the Romans, most fiat currency has ended up in depreciation, then ultimately collapsing. The collapse causes the falling of both the currency and the supported economy. Critics maintain that today’s USD is among this fallen fiat currency. In the short time America has existed, it has already experienced several unsuccessful tries in using paper currency in a bid to liberate a failing economy.
It is yet to be seen if the USD will be among the fiat failures; a common trend in the recent past. The statistics have also been ruthless. The dollar is showing signs of what ailed previous currencies before the ultimate collapse. We shall examine what causes the dollar to lose value.
What causes the Dollar to Weaken?
The strength of the dollar is defined after matching it with foreign currency. A weak dollar causes anxiety on the economy’s future, resulting to further weakening.
The general reasons of a weakened dollar include:
- Over-dependence on the dollar– The dollar is usually stashed as the major investment by most central banks across the world. Any time it shows characteristics of failing, the country gets concerned about the deterioration of the worth of their key asset. The outcome is panicky dollar selling, resulting to further weakening.
- Inflation – The value of the dollar can decline due to an increase in the prices of goods and services. This is caused by a high demand of the dollar. By increasing interest rates, the Federal Reserve strives to control the inflation. High interest rates result to less borrowing, which causes the economy to slow down.
- Remarks by Federal Reserve – When a Federal Reserve representative publicly supports a policy that is advanced by a weak dollar, sharp deterioration are likely to be seen. Such remarks insinuate that the Feds are undertaking an activity that endorses a weak dollar.
- Scarcities in trade – A broadening trade shortfall increases the world supply of dollars: Thus, reducing the demand.
- Anxiety–When an economy shows characteristics of unsteadiness, most people become cynical about the dollar’s prospect. At this juncture of uncertainty, they sell off their investments which are in dollar denomination, and purchase more tangible resources like precious stones which are protected or even advantaged by the declining of the dollar.