U.S. Economy

The value of a dollar is based in large part on its demand relative to other currencies. If more people want dollars, this rise in demand will trigger a rise in price. If demand falls, the value of the dollar will fall as well. Generally, when the U.S. economy is doing well, more foreign investors want to place their money in the United States. However, when investors believe that the U.S. economy is going to decline, as it did during the recession of 2008, they will often pull their money out of the country, lowering the value of dollar as they do.

Trade Deficit

Part of the decline of the dollar’s value can be traced to an imbalance in the amount of the goods that the U.S. imported versus the number that it exported. When a country imports more goods than it exports, this is called a trade deficit. An effect of this trade deficit is that more U.S. dollars go abroad. At some point, other countries receive enough dollars that demand for them drops, lowering their value.

Interest Rates

When investors decide whether to put their money in dollars or other currencies, they will often examine the difference between the interest rate offered by the U.S. Federal Reserve and interests rates offered by other central banks. According to ABC News, when the Fed dropped the interest rate by half a percentage point, to 4.75 percent, this narrowed the spread between the rates offered by the U.S. and the rates offered by European banks, giving investors a reason to stick with euros.

Inflation

References

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