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Last Updated: Monday, 22 November, 2004, 13:50 GMT
Q&A: Why the dollar's in decline
US tourists in Germany
US tourists will become a scarce sight

The dollar has hit a series of historic lows against just about every currency - and the question on everyone's lips is how far further it can go.

How low has the dollar fallen?

It's breaking all sorts of records.

The pound is way out in front, and is currently at a 12-year high.

The euro is also at an all-time high, but it has only existed since 1999; elsewhere in Europe, the Swiss franc is at its strongest since 1995, and the Swedish krona has hit post-1997 highs.

The yen has been somewhat held in check by Japan's central bank, but is still at a level last seen in January 2000.

The euro, the currency that everyone seems to be watching most closely, has now gained more than 10% against the dollar in the past six months, and fully 58% since its historic low of 84 US cents in July 2001.

What's behind all this?

The boil has come off the US economy somewhat from growth at an annual rate of 8% earlier this year, and with jobs still hard to come by.

But growth of 4%-plus is still comfortable, and well ahead of Europe and Japan.

But the expansion is out of balance.


The US's consumers are buying imports in ever-increasing amounts, and the country needs to borrow to finance the trade and current-account deficits that result.

Globally, goods and services flow into the US, while cash flows out, producing a constant pressure on the value of the greenback.

US interest rates stand at 2%, up from the 45-year low of 1% earlier this year but still rock-bottom by historical and international standards.

Scarcely a great lure for the international flows of capital that govern exchange rates - and fund a massive budget deficit as well.

And Washington's once-ironclad commitment to a strong dollar seems to have waned, perhaps because politicians realise that America stands to gain from having a weaker currency.

What have the effects been?

The value of the dollar plays an absolutely central role in the global economy.

Oddly perhaps, the US suffers least of all. Although its rampant consumers will find it harder to slake their thirst for imports, its companies will become far more competitive, reaping profits and boosting jobs.

Meanwhile exporters in Europe and Asia have found it harder to sell their products into the US market.

American tourists, the free-spending mainstay of many a European or Asian resort, may stay at home.

International companies will suffer uncertainty and complicated book-keeping.

And because commodities such as metals and crops are traded in dollars, their prices may have to rise; gold and oil have both boomed as the dollar fell.

Is there an upside?

Not much of one.

Shopping in New York may be a more affordable option - although not necessarily, if you are planning to buy Japanese-made electronics or European toys.

More broadly, companies will find it cheaper to invest in the US.

Shares might be a worrying purchase for some right now, but a big corporate acquisition in the US could be reasonable value under the right conditions.

Can the dollar go much lower?

Most people seem to think so.

The general consensus is that the pressure on the dollar will persist: although the declining dollar has hit the headlines this week, the factors behind it are long-term, structural issues that are not going to go away.

Even Federal Reserve chairman Alan Greenspan has added fuel to the fire.

"It seems persuasive that, given the size of the US current account deficit, a diminished appetite for adding to dollar balances must occur at some point," he said in mid-November.

Gnomic, perhaps; but by Mr Greenspan's usually impenetrable standards the warning that the bill for the towering deficits could fall due sooner rather than later might as well have been written in glowing letters a metre high.

After all, the deficits, and the dollar, rest on the willingness of the rest of the world to buy American - or at least to keep picking up its debt.

What does this mean for the rest of the world?

In time, of course, Europe and Japan - the two main zones of slow economic growth - will pick up speed, and the imbalance between the US and the rest of the world could start to be corrected.

But that could take years. And if it does come more quickly, the pain of readjustment could be intense.

In the meantime, the question must be whether rich countries will take action to prop up the dollar, as they did in 2000 in support of the euro.

Options this time around are limited, however: interest rates in Europe and especially Japan are more likely to rise than fall, and there does not generally seem to be the sort of global consensus needed to coordinate efforts.

Indeed, the November meeting of G20 finance ministers failed (under heavy US pressure) even to include the dollar on the agenda.

The dollar seems likely to fall: betting just how far is one of the best ways imaginable to lose even more money.




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