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Last Updated: Wednesday, 24 January 2007, 11:19 GMT
Q&A: The fall of the dollar
US flags fluttering in the breeze
US domination of the world economy may be at stake
The US dollar has continued its recent decline, hitting fresh lows against the pound.

Sterling hit a 14-year record against the dollar on Tuesday - above $1.99 on currency exchanges - almost breaking the key $2 rate.

The downward pressure on the greenback looks set to continue, with wide-ranging consequences at home and abroad, for both companies and consumers.


How will the dollar's slide affect ordinary people?

Back in the 1960s when governments, not markets, decided the fate of currencies, Britain once lowered the pound's exchange rate by 18% while telling the public that "the pound in your pocket" had not been devalued.

Of course it had. The purchasing power of the pound was eroded as the cost of imported goods went up, although British firms were able to sell their goods abroad at more competitive prices.

The US is now going through the same process. As the dollar falls against other currencies, goods imported from abroad become more expensive for US consumers.

The impact will be particularly be felt on oil prices, as two-thirds of US oil is imported.

Dearer oil means petrol price hikes, higher transport costs for goods and more expensive heating.

I don't live in the US, but I'm planning a trip there to do some shopping. Surely it's good news for me?

Yes, indeed. Your pounds, euros or yen will buy more dollars than before, making goods in US stores much cheaper for you.

But the upward pressure on prices could lead to a hike in US inflation this year, which would cancel out some of those gains for those of you planning to travel later.

And if you work in tourism, you have to bear in mind that people in the US are less likely to visit your own country because their holidays abroad will become more expensive.

What about the wider US economic impact?

The fall in the dollar could actually do the US economy some good, by helping to reduce the country's huge trade deficit - the difference between the amount the US imports from the rest of the world and the amount it can sell to the rest of the world.

That deficit is now heading above $800bn for 2006, or 7% of the US economy.

As the dollar declines in value, US consumers have an incentive to buy domestic goods rather than foreign ones, helping to correct what has become a huge global imbalance.

But if US inflation does surge ahead, it might force the Federal Reserve, the country's central bank, to raise interest rates in a bid to keep price rises in check.

That could make the country's highly-indebted consumers more reluctant to buy any goods at all, choking off economic growth and increasing fears of an economic slowdown.

How will UK jobs and industry be affected?

The dollar's fall could be bad news for UK and European manufacturing industry.

It will create difficulties for UK and other firms trying to sell their goods to the US public, since Americans will have to pay more for them in dollar terms.

In recent years the US has been the engine of world economic growth, and its export market has been very important.

But some Europeans now argue that with an economic revival at home, the impact could be lessened.

How long will the dollar's slide continue?

While no one can predict the course of currency markets, the pressures are growing on the dollar.

Economists have been saying for many years that the growing trade deficit is unsustainable in the long-term.

In addition, the US economy is weakening, while the economies of Europe and Japan are getting stronger.

This is likely to mean interest rates rising in those countries, which could attract more funds from the US.




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