Fall in value of US Dollar

Forex Traders have been sitting on the edge of their seats recently as the biggest currency in the world, the US Dollar (USD) seem to suffer a collapse and depreciated against other major currencies in the world. Such fluctuations has the ability to make millionaires or bankrupts overnight.

The reason for the fall lies mainly with the originator – United States. While the gloom over the global financial crisis might have subsided, the federal government still needs a size-able budget to keep the government going, to keep the economy going and to even keep the war in Afghanistan and Iraq going. All these money comes from loans, issued in the form of treasury securities, which essentially has the same effect of  issuance of new US Dollars. As the US government continues their trend of spending and chalking up budget deficit, the amount of securities issued increases. This essentially depreciates the value of the US Dollar.

Americans might not be happy to see their purchasing power decrease in the global marketplace. For exchange, in the first week of Oct 2009, the US Dollar fall against the Singapore dollar from an original exchange rate of 1 USD = 1.414 SGD since the start of the month to 1 USD = 1.399 SGD just after 1 week. Similarly, the US Dollar depreciated some 2-3% against the Euro, Yen and GBP during the same period.

Americans themselves are not the only one crying foul. Countries like China, Singapore and Japan are unhappy as well. These countries hold Hugh reserves in US Dollar and the depreciation of the US Dollar essentially mean a decrease in the value of their reserves. Correspondingly, the value of gold has spiked up as investors and institutions switch to gold as a safer haven in the storage of their wealth.

 Gold is physically scarce compared to dollar notes (you can print as many dollar notes you want but there is only a limited quantity of Gold you can mine). With the recent fiasco in the depreciation of the US dollar, nations will continue to clamour for an alternative currency that can challenge the US Dollar as the new “Global Currency”. This will reduce the dependency on US Dollar. Both the Euro and the Chinese Yuan are well poised to take on this role in the medium term. And the process might just get expedited every once when US Dollar suffers another dip in the value.

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