as compared to other currencies, the dollar’s international value declined in the 1970’s. why? But, from 1981-1985 the dollar was strong. why? how is the U.S. dollar doing now?
thanks
✅ Answers
? Best Answer
a lot of investors in 70’s must have realised that there is a greater return on assets abroad than usa and it must have been true but idk for what particular reason in the 70’s.
But what this does is, the investors all over the world now invest in all parts of world but not america and this put’s america’s capital account in a deficit where more people in america are demanding foreign currency than foreigners supplying (investors investing). This brings an excess demand for foreign currency and unofficial market exchange rate increases. So, the situation would have been e.g. If 0.6dollar = 1 pound, in late 70’s 1.5 dollars = 1 pound so after change it takes more dollars to buy a pound, namely domestic currency (dollar) depreciates while foreign currency appreciates.
One interesting fact, when the gdp of america is relatively low, the above would have taken place as a gradual snowball effect.
Now, in the 80’s when the gdp might have increased, income also increases as people earn more when the country does good, namely the return on assets in america increases and investors start coming back to america, capital account is in huge surplus as more foreigners supply foreign currency than locals demanding foreign currency. So an excess supply of foreign currency decreases exchange rate because domestic currency (usa) appreciates and foreign currency depreciates, so now again it will take less dollars to buy a pound.
The reason why an excess supply of foreign currency will decrease exchange rate (in our case dollar/unit pound) is because as more and more people start giving their currencies in return for dollar, dollar will have to appreciate making foreigners pay more of their currency for one dollar, meaning their currency has depreciated as they pay more for a dollar. This took place when there was excess supply of foreign currency and dollar became stronger.
As every country has capital inflows and outflows, the key is gdp, check out the gdp’s for the era’s you’re mentioning and above info will be easy for you to digest.
Let me know too, i also lately started studying eco.
Above all is just info, all that info is put into diff. graphs and frameworks, its so interesting.
Right now how dollar is doing? if you understand above info, go to currency converter and see for yourself and prepare to be amazed.