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"Reasons and Consequences of the Fall of the Dollar"



The value of the US Dollar has since the beginning of March this year fallen drastically. Economists and investors worldwide have tried to explain the cause of this all-time low of the American currency. The consequences of the fall are many and complicated. I will in the following outline the main reasons of the fall, and also try to state a few of the consequences.



The first, most obvious reason for the fall, is Bill Clintons $20 billion plan to help Mexico's economy, which hasn't seemed to help at all. Investors' faith in the Dollar immediately diminished, and Dollars were put on the market in huge quantities, resulting in prices going down.



The Mexico incident, is though, only the top of the iceberg. The Dollar has been decreasing since 1985. This trend has been a direct consequence of the Plaza agreement, which involved agreement between leading industrial countries to force the Dollar down. This, and the fact that the Americans always have had a problem with current account deficit, have had a negative effect on the Dollar. Another reason why the Dollar has had a steep negative gradient, is that USA has been supplying the market with more Dollars than demanded, naturally decreasing Dollar value. This trend has been a consequence of the pension and mutual fonds investing in overseas equities and bonds.



The consequences of the last months fall, are many. One of the biggest, will be the increased US export. Foreign investors do not want to miss a chance like this one, so they buy American products, in Dollars, at bargain prices. Especially the Japanese have proven this prediction right. Furthermore, a quite serious consequence of the record-breaking low, is the crack of the European exchange-rate mechanism (ERM), which is beyond the scope of this paper *and my Knowledge) to explain.
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