Dollar Dump

A few days ago Russia decided to stop following the dollar so closely and instead switch to a mix of the dollar and the euro.

It has begun.

John Snow remarked that the administration would continue to let the dollar fall, and it is. There is an upside to the falling dollar in that it helps the export sectors. But we're nowhere near low enough (and we don't want to be) to compete with China or India.

The reason for the dollar's decline goes like this. Countries buy the dollar because it is a strong, frequently used currency, so poor countries might peg their currencies to or even adopt the dollar in order to curb inflation and promote confidence. Countries also buy US foreign debt for much of the same reasons; we're big and reliable. However, because of the Bush administration's fiscal policies that are increasing the budget deficit, this means that our debt is becoming less and less attractive, and interest rates are rising (in order to make our debt as attractive as before). As this happens countries are not as willing to put stock in the American economy and they don't buy as much US debt (which makes it harder to finance the deficit and American lifestyles, which are heavily in debt - and this economy is screwed if a credit crunch comes in soon, look to the housing sector) and they stop pegging to the dollar because they feel it's overvalued and weaker. This just eggs on the dollar fall, as they sell it out of their currency reserves.

Someone should've reminded Bush the job required math.