Friday, June 6, 2008

why the dollar has weakened

obviously because there is a less demand for the US dollar in the forex. But why?

1. Crude Oil is traded in dollars. All developing/developed countries are buying oil in dollars. There is an excessive supply of dollars in the market. The supply here is more than the demand. And hence by supply-demand principle, the dollar is becoming weak.

2.No one wants to buy US dollars. People buy US dollars for investing in treasury bills, US corporate bonds when they know that the economic situation in US is strong.
But currently the economic situation in US is in doldrums. Few people want to invest in US and hence there is a less demand for US dollars.

3. Due to recession, US Fed bank has reduced interest rates. Even greater deterrent for foreign players to invest in US.

4. A bit of higher inflation is causing US goods to be more expensive. Less people are interested in buying US goods because they are expensive. Hence they are not buying the US dollar for purchases.

5. US economy is import based. It currently has a huge trade deficit. Its pumping huge dollar supplies to the world. Due to this there is a great SUPPLY of dollar in the world. Hence value of dollar is falling.

6. Other reason why the dollar is weakening compared to other currencies is that the economic situation in other European countries or Japan or middle east is much better than in US.

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