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Dollar Decline or Dollar Collapse?


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What are the reasons the U.S. dollar is declining? Will it hurt or help the U.S. economy? Is it enough to cause a complete collapse of the dollar, as many are warning? Most importantly, what can you do to protect your financial well-being?

The dollar declines when it loses value in relationship to foreign currencies. When this happens, the dollar can buy fewer foreign goods, increasing the price for imports and causing inflation. In addition, investors in U.S. Treasury bonds will sell their dollar-denominated holdings.

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In 2008, the U.S. current account deficit was $700 billion. Over half of the current account deficit is owed to foreign countries and hedge funds. (Source: U.S. Treasury Dept.)

Partly as a result of this deficit, the dollar declined 40% between 2002-2008. The dollar strengthened during the recession, as investors sought a relatively safe haven. Since March 2009, however, the dollar has resumed its decline. This is a result of the $17 trillion U.S. debt. Creditor nations, like China and Japan worry that the U.S. government won't really support the value of dollar. Why not? A weaker dollar means that the deficit will not cost the government as much to pay back. Creditors have been gradually changing their assets to other currencies to stem their losses. Many fear that this could turn into a run on the dollar. This would quickly erode the value of your U.S. investments, while increasing inflation. 

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