The measurement of the value of the dollar is carried out by using the exchange rates, the treasury notes and also by the total value of the dollars that are held by the foreign nations. Basically, these three measurement tools are normally in sync with one another. However, regardless of which tool one has to use in measuring the value of the dollar, the dollar is losing value in the long term.
Value of the dollar
One way of measuring the value of the dollar is by using the exchange rate. This is a tool that ensures easy measurement of the value of the U.S dollar. In this case, a comparison is carried out of the dollar with other currencies in the foreign countries. Exchange rates of a currency enables a person to be able to carry out the determination of how much of the currency he or she is having can be exchanged for another currency from another country. The exchange rates keep on changing on a daily basis. This is because there is trading of currencies on the foreign exchange market (forex). The value of any particular currency on the foreign exchange market is dependent on various factors. Among these factors are; the interest rates of the central bank, the debt levels of the nation under consideration as well as the strength of the economy of that country. Many of the nations are ready to let determination of their currencies to be carried out by the forex market.
On the basis of this type of measurement of the US dollar value; in the year 2010 the value of the US dollar against the euro increased by 6 percent. This came about as a result of the weakness of the economy that was experienced by the European Union. More, in the year 2009, the value of the U.S dollar came down within the period that ran from March 3 to December 1. This drop in the value came about as a result of the concerns that were there about the debt the U.S had of 12 trillion US dollars. In the year 2008, the US dollar gained strength between the period that started from March and ended in March in the year by 22 percent. This was a result of businesses hoarding dollars in the course of the credit crisis. From the period that ran from the year 2002 and ended in the year 2008, the value of the US dollar came down by 40 percent and at this time the debt of this nation increased by 60 percent. In the year 2002, the value of one euro was equivalent to 87 cents but as in April the year 2010, the value of one euro was 1.36 US dollars (“Federal Reserve Statistical Release 2010”).
More so, the value of the US dollar can be measured by treasury notes. The Treasury Department engages in selling of the notes for an interest rate and face value that is fixed. Following this, those who invest take part in bidding at a treasury auction for a value that is above or below the face value and then later sell again on a secondary market. Paying for a value that is more than or above the face value by the investors is brought about by a high demand meaning they accept a yield that is lower. On the other hand, paying lower than the face value is brought about by low demand implying that they receive a yield that is higher. This is the reason as to why a high yield implies low demand up to the time the yield climbs to a level sufficient to bring in dollar demand that is renewed.
In the application of this kind of measurement of the value of the dollar, in the year 2010, the dollar gained strength by 1.5 percent within the period that started from the month of January to Mid-April. At this time, the 10-year Treasury note yield was falling (from 3.85 percent to 3.79 percent). In the year 2009, the value of the dollar grew weak while the 10-year note yield increased from 2.15 percent to 3,28percent. This took place in the period starting form mid-January to December 1. Within the period that started from the month of April 2008 and ended in the month of March 2009, the yield came down from 3.57 percent to 2.93 percent. This gave an indication of a strong dollar demand. Just before April 2008, the yield remained between 3.91 percent and 4.23 percent and this was an indication of having a stable demand for the dollar. This made the US dollar to be a world currency (“U.S Treasury”). .
In general or overall terms, the value of the US dollar is growing weak on the basis of the measurement of its value by the exchange rates as well as by the treasuries. There is global recession and all the investors all over the world are willing to carry out investment that is safe and the dollar seems not to be very safe especially considering the US debt of 12 trillion dollars. The level of the safety of the dollar decreases with the increase in the level of the debt (Amadeo Para 11).
Another way of measuring the value of the dollar is by considering the foreign currency reserves. According to Amadeo, “the dollar is held by foreign governments who have an excess of cash, held in foreign currency reserves. This excess happens when countries such as Japan and China, export more than they import” (Para 13). Because these nations have concerns about the reducing value of the dollar, there is a reduction in the reserve levels that are held in dollars.
Basing on the most recent report that was given out (Q4 2009), it was established that there was 2.8 trillion in foreign government reserves held in dollars. This gives representation of 62 percent of the overall reserves that are measurable which is a reduction from Q3 2008 where this figure stood at 67 percent. For the reason that the dollar percent is gradually decreasing or declining, this gives an implication that the foreign governments are slowly by slowly taking away the currency reserves they have out of dollar (Amadeo Para 14).
In considering how the dollar value affects the economy of the U.S, at the time the value of the dollar declines, this brings in the implication of making the goods that are produced in the US to be cheaper and much more competitive in comparison with those goods that are produced in the foreign countries. But on the other hand, this decline has an implication on the oil prices and prices become higher in the summer because the pricing of oil is done in terms dollars. Every time the value of the dollar declines, those nations that are producing oil may increase the oil prices with an intention of maintaining the profit margins in terms of the local currencies.
The value of the dollar is basically measured using three ways. These ways involve using the foreign exchange rates, treasury notes and foreign currency reserves. In general terms, as it has been established in the discussion above, the value of the dollar is declining in the long term.