U.S. dollar ($)

The dollar continues to be vulnerable in the foreign exchange markets. The dollar has lost value against all the major currencies including the euro, yen, Swiss franc, and British pound sterling. The dollar has declined primarily because of the burgeoning twin deficits (fiscal and trade) and the unfavorable interest rate spread between the U.S. and most other countries.

The allure of U.S. assets, particularly at the end of the 1990s, bid the dollar up in value as investors competed for positions in the equities market and purchased companies for a place in the U.S. market. Now, currency market players pounce on anything negative United States despite the on-going problems in Europe and Japan. The plus side of a weaker dollar is that it makes U.S. exports more competitive abroad. It also raises the value of repatriated profits to the United States. But despite the dollar’s decline, imports continue to grow because exporters overseas do not want to lose market share by raising their prices.

The U.S. dollar staged a rally especially against the euro and pound sterling as investors sought the safe haven of the U.S. as recession spread rapidly around the world. But the dollar’s strength was gleaned more from economic weakness in Europe and the UK than the economic strength in the U.S. However, the yen rallied against the dollar as investors unwound risky carry trades which had been funded by low cost Japanese funds. With investors less risk averse, the dollar declined — investors were concerned about the pace of the U.S. recovery along with its ballooning fiscal deficit. But not for long — the Eurozone sovereign debt situation along with slowing global growth made investors wary of risk. The euro continues to be vulnerable to the elevated woes in the Eurozone while the yen, along with the U.S. dollar continue to be considered safe havens. Recent progress in Eurozone debt negotiations has lifted the euro against its major counterparts.