The dollar's value against major currencies has fallen in recent months as the U.S. fiscal outlook worsened and amid expectations that interest rates will remain close to zero for some time to fight the economic downturn.

This week, the euro broke above the psychologically important level of $1.50 driving gold prices to record levels, prompting many global central banks intervening on currency markets to slow the dollars fall.  (Fig. 1)


How Did We Get Here?

Since the financial crisis last fall, currency markets have taken their cues mostly from stock markets. When stocks plunged in March of this year, investors rushed to the safety of U.S. government bonds, pushing the dollar index up to 89.62, the highest point this year.

Since then, however, it has been a steady downward drift for the greenback. As markets steadied into a rally, traders sold Treasuries and Dollars for riskier assets and higher returns, pushing the dollar lower against other major currencies.

The value of the euro has risen by 79% in nine years since euro hit 0.84 in Oct. 2000 (Fig. 2), and the White House has done little to curb the dollar's slide during this period. Loose monetary policy and a weak U.S. dollar are part of the consequences resulting from the U.S. recent trends of unprecedented spending, fiscal deficits, and accumulations of government debt.
"Strong Dollar Policy"…Not

Although the current Administration officially supports a strong dollar, the latest indications came from Federal Reserve Chairman Ben Bernanke and Larry Summers, President Obama's chief economic advisor.

Mr. Bernanke said this week that the U.S. should cut down on its budget deficit and increase the savings rate in order to reduce global imbalances.