The greenback has been declining relative to other major currencies for months. The dollar is down 14% against other major currencies since March.
Dollar is making a free fall due to the huge growing US trade deficit, and the large Federal budget deficit. The trade gap of US along with the war in Iraq which is working as a fuel is increasing US fiscal deficit. In August, the gap between what the U.S. exports versus what it imports narrowed to $30.7 billion, from $31.9 billion, as exports rose and imports fell as per the Commerce Department. The US budget deficit hit a record $1.4 trillion (£877bn) in the year to 30 September. The deficit was equal to 9.9% of gross domestic product (GDP) - more than treble the 2008 level. Climbing unemployment, declining tax revenues due to the recession. along with the TARP funding process are the factors that have added fuel to the Fiscal deficit, resulting the dollar to fall. Much of the trade gap relates to US commerce with East Asian countries such as China, Japan, and Korea, who sell much more to America than they buy.
One of the prominent ways of making dollar strong is to adjust the exchange rate in such a way so that the US goods cheaper and Asian goods more expensive. But this process often takes a long time, and in the meantime, it is fraught with dangers. The higher price of imported goods could lead to a hike in domestic inflation. Moreover it could take several years for the US consumers to switch back to buying more US goods. But before this situation begins the international economies will face more problems in coming days.
Countries that have derived an increasing proportion of their sales and profits from the US market could also be hit by falling demand for their exports. The free fall of US dollar might force other countries to shift from dollars, holding treasury and other assets in dollar form. China has based its entire economic policy for years around keeping its own currency low against the dollar to encourage exports, a strategy that would be undermined by a disorderly decline in the dollar.
As the value of the dollar falls, their reserves of the currency also reduce in value, as do the yields on the US Treasury bonds held by many of their central banks. With the budget deficit exceeding 10% of gross domestic product this year and less clear path to lowering fiscal deficits puts the Greenback under more pressure. So Dollar will face hard times in coming days.