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The Falling Dollar – A Boon for Gold Investors

The stories about the falling dollar have hit the headlines in recent times. The dollar, being the currency of the world’s largest economy and leading global superpower cannot be taken for granted. Indeed, investors and analysts have taken the news with the seriousness it deserves.

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What are the causes of the falling of dollar?

The reasons for the dollar fall are wide and varied. However, economists do agree to the following as some of the causes of its fall;

• Weakening economy
• Strengthening foreign economies
• Widening trade deficit
• Falling interest rates
• Rising inflation

Weakening Economy

It is no secret that the world economy has been on the decline for almost a decade now. The crisis that has affected the housing industry has had a domino effect on other sectors of the domestic economy. The overall output in terms of GDP in relation to the global GDP has been declining.

Strengthening Foreign Economies

It is a well-known fact that the US and EU economies are ailing as the BRICS (Brazil, Russia, India, China, and South Africa) economies continues to soar up at hitherto unprecedented rates. Indeed, many analysts project that China will overtake US as the world’s largest economy in about 30 years’ time.

Looking at the G7, the world’s largest economies, you realize it is no longer a club of who-is-who in the Western circles. China and Brazil have penetrated this club of the wealthy while India and Russia are aggressively knocking at the door and it is just a matter of few years before they chuck out some European nations out of this prestigious club.

When foreign economies, such as that of BRICS states strengthens, it means the world turns to them as an alternative source of trade to the detriment of the US economy. This simply means that the demand for US currency falls in preference to the demand of currencies of those other economies. Indeed, IMF and many other foreign reserve entities have started stocking up the Yuan, which is the official currency of China.

Widening Trade Deficit

Widening trade deficit simply means that the country is importing more than it is exporting. This results into more supply of the dollar to the international market than demanded since the US has to trade-off the dollar in order to purchase those other foreign currencies to meet its insatiable demand for import. This results into a decline in the value of US dollar.

Falling Interest Rates

In the international financial markets, a country with higher interest rates attracts more foreign investments than a country with lower interest rates. Since US interest rates have been falling recently, the US economy has become less attractive to foreign investors, thus, the demand for dollars for purposes of investing in US stocks and bonds has declined leading to a lower price for the US dollar in the international markets.

Rising Inflation

There is nothing that scares off both domestic and international citizens as rising inflation. The inflation has been steadily rising. This has had a negative effect on the local economy as locals prefer being cautious and thus putting their money in safe hedges such as gold since the housing industry has exploded.