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Dollar Decline or Dollar Collapse?

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Dollars
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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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  • July1, 2014 - FATCA (the Foreign Account Tax Compliance Act) will require foreign banks and other financial institutions to disclose information about income and assets held by U.S. customers. Its goals is to root out wealthy U.S. taxpayers that are deliberately hiding money offshore. It also want to stop foreign banks who are using tax evasion as a profitable line of business. Many are worried that foreign banks will drop U.S. customers, to avoid compliance, thereby pushing them away from dollar-denominated assets. 
  • March 1, 2014 - Could a slump in the Chinese economy drag the rest of the world into recession? Why people are worried.
  • October 16, 2013China allowed British investors to pour $13.1 billion in its tightly restricted capital markets.This makes London the first trading hub for the yuan outside of Asia
  • May 10, 2013 - Central banks may be increasing their holdings of Chinese yuan.
  • June 7, 2012 - The yield on the 10-year Treasury note dropped to its lowest point in 200 years, indicating dollar strength.
  • August 10, 2011 - China's currency, the yuan, rose to 6.4167 against the dollar, a 17-year high. This showed further dollar weakness as a result of the debt ceiling crisis.
  • March 28, 2011 - Despite a $250 billion rebuilding cost, Japan doesn't need to sell its U.S. Treasury holdings to reconstruct after its earthquake/tsunami/nuclear disaster.
  • October 25, 2010 - G-20 Meeting Drives Stocks Up, Dollar Down
  • June 21, 2010 - Is the Dollar Losing Its Grip?
  • October 22, 2009 - Will Plummeting Dollar Drive Up Oil Prices?
  • October 12, 2009 - Central Bank Stampede Drives Down Dollar
  • September 30, 2009 - World Bank Head Calls for New Global Currency
  • September 23, 2009 - Could a Dollar Decline Drive Dow to 14,000 in 2010?
  • August 25, 2009 - How Much of Dow Rally Is Due to Dollar Decline?
  • April 30, 2009 - Could a World Currency Replace the Dollar?
  • March 13, 2009 - Is China Threatening to Sell U.S. Treasuries?

Background

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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