Value of the Dollar

[Dr. Shane]

What do you think?

[Dr. Shane]

I will wait a while before giving my opinion and backup to support it. I am interested in seeing how most here think international currencies work. Don't be afraid to guess. So far only one person has weighed in. I have not voted.

[Bravus]

I didn't vote on the value question (the second question) - I guess it's all of those, but the prime determinate is interest rates/returns on investment, which wasn't there directly.

On the first question I said the Fed Chairman, since he (with the board) has the direct control of interest rates. We've seen the impact of interest rate changes in both the Australian and Canadian currencies just in the last couple of weeks.

[Dr. Shane]

It seems Bravus and I are thinking pretty close to the same.

The chairman of the Federal Reserve has the most impact on the value of the dollar of those listed. At one time all US dollars were backed by gold so anyone with dollars could exchange them for gold. The US went off the gold-standard in the 1970s so dollars are now bought and sold on the world market much like stocks. Just like stocks, a currency can be over-rated or under-rated.

The value of the dollar is determined mostly by capital return on investment. That is impacted by a number of factors, not the least of which is the interest rate. Capital return on investment simply means how much money a person can get back from their investment made in dollars.

A big part of that are goods and services sold in dollars. Oil plays a role in that as oil is sold in dollars. However capital return is not the sole determination.

Another is speculation. As the US budget deficit grows, some in the international community speculate that the US may have future economic problems and such speculation can cause the dollar to fall.

The demand for US goods impacts the value of the dollar. Since US goods are sold in dollars, the higher the world demand is for our goods, the greater the demand for dollars will be and the value will increase. That is why free-trade agreements, that remove trade barriers, can increase the value of the dollar.

Since the Federal Reserve not only determins interest rates but also how many paper dollars to print each year and how many old ones to destroy, it plays the biggest role and has the most power in determining the value of the dollar.

The euro is the dollar's competition. Ideally both the dollar and euro would be equal. That would allow US products to be sold in Europle and european products to be sold in the US without consumers losing on the exchange rates.

Now: how does oil play a role? Well, since oil is sold in dollars it is one of the many things a person with dollars can buy. However computer software produced by Microsoft is also sold in dollars. So while oil does impact the value of the dollar, so does Microsoft and all the other goods and services that dollars can buy.