
                                   
 
        "Reasons and Consequences of the Fall of the Dollar"
 
      The value of the US Dollar has since the beginning of March
 this year fallen drastically. Economists and investors worldwide
 have tried to explain the cause of this all-time low of the
 American currency. The consequences of the fall are many and
 complicated. I will in the following outline the main reasons of
 the fall, and also try to state a few of the consequences.
 
      The first, most obvious reason for the fall, is Bill Clintons
 $20 billion plan to help Mexico's economy, which hasn't seemed to
 help at all. Investors' faith in the Dollar immediately diminished,
 and Dollars were put on the market in huge quantities, resulting in
 prices going down. 
  The Mexico incident, is though, only the top of the iceberg. The
 Dollar has been decreasing since 1985. This trend has been a direct
 consequence of the Plaza agreement, which involved agreement between
 leading industrial countries to force the Dollar down. This, and
 the fact that the Americans always have had a problem with current
 account deficit, have had a negative effect on the Dollar. 
  Another reason why the Dollar has had a steep negative gradient,
 is that USA has been supplying the market with more Dollars than
 demanded, naturally decreasing Dollar value. This trend has been a
 consequence of the pension and mutual fonds investing in overseas
 equities and bonds.  
      The consequences of the last months fall, are many. One of the
 biggest, will be the increased US export. Foreign investors do not
 want to miss a chance like this one, so they buy American products,
 in Dollars, at bargain prices. Especially the Japanese have proven
 this prediction right. Furthermore, a quite serious consequence of
 the record-breaking low, is the crack of the European exchange-rate
 mechanism (ERM), which is beyond the scope of this paper *and my
 Knowledge) to explain.
  Important to the Deutch-mark, is the transfer in faith from the
 Dollar to the D-Mark, since the Dollar has proven itself
 untrustworthy. Many speculate, that the D-Mark now is going to be
 the new favorite currency of the world.
  The Dow Jones has been affected directly by the decrease of the
 Dollar. Peoples investment of money, has switched from currencies
 to stocks, thereby increasing the Dow Jones, reaching an all-time
 high yesterday.
  To the average consumer, the fall in the Dollar, has meant several
 changes. One is that German tourists can now pay 20% less in D-Mark
 for a hotel room in Florida. Another is that UK tourist have to pay
 relatively more to go to mainland Europe on vacation, as opposed to
 going to the States.
 
      An essential question now seems to be: What can be done? It
 seems that the States most likely have asked themselves this
 question, but aren't really dealing with the problem. The most
 obvious step towards raising the Dollar, would be increasing the
 interest rates, making the American market more interesting, for
 profit-seekers, but the interest rate have remained stable during
 the turbulence of the Dollar, showing that the States maybe are
 happy about the situation. One explanation is that the low Dollar
 (as mentioned) stimulates export.
  In my opinion, heavy measures should be taken to increase the
 value of the Dollar. During the fall, both the Yen and the Mark
 have gained strength, and seeing that there is not much chance the
 neither will fall, the Americans are digging their own grave by not
 dealing with the problem. It will be hard foreign, as well as
 domestic investors, to regain faith in the Dollar.
 
 
                                                   Jens Schriver
                                 
 
 
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