What causes currency to decline in value?

Answer 1

If Central Banks in other countries raise their interests rates higher than those of the US Central Bank, with no corresponding move in US interest rates such outside markets will attract capital currently in the US. It is important to note that not only the level of foreign interest rates attracts capital from the US, but also the stability of a countries financial and banking institutions. Investors consider all these factors before moving their money.

Once investors start moving their money/diversifying their investments -- usually because of the abovementioned change in interest rates, and also because of an often generally related worry about the health of the US economy, and/or a greater attraction of foreign countries' markets for a variety of reasons -- the value of the dollar decreases. This leaves an excess of dollars on the currency market, and unless the dollars are purchased its value decreases (for simplicity's sake treat this situation like classic supply and demand-- if there is excess supply without corresponding demand, the price of a good falls). In the real world, this phenomenon may be magnified by petrodollar movement as most oil-producing nations trade oil in dollars; as the dollar looses value (for the abovementioned reasons) oil-producing nations seek to diversify their dollar reserves into different currencies because their profits are smaller if they do not. This further causes a decrease in the value of the dollar.

Answer 2

Any Fiat currency has value only so long as people are willing to exchange it for other things or services of value. The dollar, or any currency, weakens when it takes more and more of them to purchase any given thing, such as other currency. For example, if in 2005 it took two dollars and fifty cents to exchange for one British Pound, and in 2008 it takes three dollars and twenty-five cents to get that one Pound note, the dollar is said to have weakened. Weakness is usually caused by PERCEPTION in the financial marketplace. If world currency traders think the dollar will be worth less in the future than it is now, they will place less value on it. A great deal of this is speculation, and 'the herd mentality' - if one person bets against the dollar, others will follow because they think he or she knows what he or she is doing. Pretty soon you have a whole mob of people acting in the same fashion, which may or may not have any basis in fact. For the better part of half a century, the US dollar has been THOUGHT OF to be a very sound currency, primarily because of our economy and very stable political system. However, other economies are catching up. Currencies like the Euro, the Yen and on are gaining in value while the dollar slips. Another process which can cause a currency to weaken is a large government deficit (as we have in the US) and a large balance of foreign exchange. As petroleum goes up in price it takes more and more dollars to buy a barrel. As government expenditures go up and up, the treasurey prints more and more dollar bills, which, when the economy is not robust to support them, effect a lessening in the value of each new dollar printed. Until 1935, the US Dollar was tied to a specific amount of gold - the Treasure could not print money unless there was gold in Fort Knox to back it up. FDR took us off the 'gold standard', in order to print more money to make people think the economy was getting better - if you see more dollars floating around, you think times are good. But people aren't dumb - they realized that the increase in the money supply didn't directly correlate to an increase in goods and services. In fact, when the supply of goods and services stays constant, or falls, then more and more dollars are needed to exchange for any particular good or service. Money is just paper - if you think it has value, you'll take it in exchange for labor, goods, services, etc. You do this in the hope that other people will take YOUR paper in exchange for stuff you want. The dollar may weaken because of loose monetary policy (creating too many dollars) and lack of confidence in aGovernment, large trade and budget deficits, unattractive interest rates on dollar-denominated investments compared to investments denominated in other currencies, or other reasons.

Answer 3

It all has to do with economy. The stronger the economy of a certain country, the higher the value of their currency.

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It has to do with supply and demand of a countries economy. With more exports, a country's currency will increase in value. There will be x amount of currency available at a given moment, if a bank (via a person or business wishing to buy a country's currency) demands more of their currency more often, the price will tick upward.

95% of currency exchanges are done for trading purposes and not to actually acquire the currency. So, although the above is true, 95% is based on perception of a countries imports/exports, political stability and future, etc.

Answer 4

Inflation takes place when there is more money in the economy than there are goods. When inflation is high every good gains value but the currency loses the purchasing power (loss of value in terms of real goods and services), this has a impact on economy.

When there is an inflation it's make currencies lose value because in the money market, the money that they use is more than they limit in the market