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Author: pauleckler Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 267325  
Subject: Re: Deflating Dollar Date: 10/12/2012 4:58 PM
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The dollar rises or falls in value vs other currencies and against commodities like gold depending on the buy/sell decisions of all the traders out there.

When foreigners buy US stocks, they must convert their currency into dollars. When they sell, they usually convert their dollar holdings to some other currency and sell.

People buy the dollar because of their confidence in its future buying power. As long as Congress makes good on its promise to make the dollar valuable, it holds its value. But our trade balance causes dollars to go over seas to buy imported oil and manufactured goods from China etc. Dollars come back for things exported from the US like corn, coal, and high tech manufactured goods. But dollars tend to accumulate over seas because out trade balance is unfavorable. We buy more than we sell.

Those dollars come home when Chinese companies decide to buy land, businesses or other assets in the US. So long as they can do that profitably, the dollar is probably OK. But it does mean to buy imports we are gradually selling our country to others. If the trade is blocked for some reason (like Chinese efforts to buy seaports or now telecommunications operations) the dollar weakens.

The dollar is not backed by gold any more, but rather by confidence that the US economy and Congress will make it worth something.

If currencies become uncertain as threatened in Europe as if Greece leaves the Euro, people will be stuck with a local currency with much less buying power. Hence, inflation will be severe and many will lose their savings and the value of other assets may skyrocket in a currency with little value. An example of how bad it can be. Hyperinflation in South America one caused people to immediately cash pay checks and buy items like TV sets that could be sold for higher prices in a day or two. In Germany hyperinflation resulted in currency that was worth more as scrap paper than as money (in 1923).

Weak currency can be disaster. And people fear the situation with large deficits and poor balance of trade in the US, but Europeans seem to regard the US dollar as a safe place to park funds in times of uncertainty. Lets hope that confidence can be retained.
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