Dollar Decline or Dollar Collapse?

What are the reasons why the U.S. dollar is declining? Will it hurt or help the U.S. economy? What can you do do 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.

In 2006, the current account deficit was $856 billion -- the largest deficit ever. 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 has decline 40% in the last six years. This is because creditor nations believe that the U.S. government is not supporting the value of dollar. A weaker dollar means that the deficit will not cost the government as much to pay back. As creditor nations realize this, they 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.(See Could Saudi Arabia Prompt a Dollar Collapse?)