Is the statement true or false?"The USD will fall further relative to other currencies as the new US government continues to borrow very large sums of money in order to rduce the negative impact of the financial crisis on both financial intermediaries and on the real economy"?

In what time frame?

QuoteOriginally posted by: AnthisIn what time frame?can you give an analysis in different time-frame??

Well, i dont see significant fluctuations from current levels (1.4USD/EUR) over the next months. But I wouldnt be surprised to see the rate exceeding 2, over the next 2-3 years.

QuoteOriginally posted by: AnthisWell, i dont see significant fluctuations from current levels (1.4USD/EUR) over the next months. But I wouldnt be surprised to see the rate exceeding 2, over the next 2-3 years.You mean 1 Euro == 2 dollar?

Yeap

QuoteOriginally posted by: AnthisYeap

And the dollar might disappear as a reserve currency. Like anything else, what happens when demand decreases?

"Like anything else, what happens when demand decreases?"Ah, but the USD is NOT like anything else, its owner practices ultra aggressive demand management. As the Texas maverick Republican Ron Paul has eloquently pointed out, the USD has and will attack any country that threatens to price oil in EUR. The first modern victim was Saddam Hussein. Then after Hugo Chavez said he would sell oil in EUR there was a thinly disguised US-approved coup attempt in Venuzuela. And the country currently in the US crosshairs, Iran, also wants to sell oil in EUR. So far Ron Paul is 100% correct.Enough political rant. Like Anthis, I see the USD holding in for a while more then dropping big time. The rest of the world needs to get as much of the global economy in order as it can before delivering the Americans the badly needed medicine.

QuoteOriginally posted by: DavidJN"Like anything else, what happens when demand decreases?"Ah, but the USD is NOT like anything else, its owner practices ultra aggressive demand management. As the Texas maverick Republican Ron Paul has eloquently pointed out, the USD has and will attack any country that threatens to price oil in EUR. The first modern victim was Saddam Hussein. Then after Hugo Chavez said he would sell oil in EUR there was a thinly disguised US-approved coup attempt in Venuzuela. And the country currently in the US crosshairs, Iran, also wants to sell oil in EUR. So far Ron Paul is 100% correct.Enough political rant. Like Anthis, I see the USD holding in for a while more then dropping big time. The rest of the world needs to get as much of the global economy in order as it can before delivering the Americans the badly needed medicine.I dont think Saddam was hanged because he threatened to price oil in euro, but for his oil itself. Nevertheless, even if countries like Iraq, Iran or Venezuela, were countries that the US could credibly and feasibly threaten with war, i dont think that the same can happen with China or Russia or Brazil right now. The times the US was appointing governments in Latin America are just a dark page of history now. As i said history. On the other hand, do you think that the total of oil or natgas transactions today are priced in USD? If Algeria or Lybia sells oil to a European country the transaction is priced in dollars? No. USD's seignorage privilege was not stemming solely because most transactions in oil and a number of other commodities was priced in USD. It stems from its status as a reserve currency. This status pushed the USD up and kept the USD interest rates low. This allowed the US government and citizens to raise low debt from the rest of the world, import almost everything cheaper, and export debt. A weakening USD will deteriorate people's confidence on USD as a reserve currency which will lead to further decline of its value. A weakening dollar will make much harder for the US to serve its debt to the rest of the world, which will lead to wider credit spreads, further deterioriation of confidence to USD and further value decline. A weakening dollar, will import inflation in the US since production and consumption patterns in an economy do not change overnight. And as anybody knows inflation eats like a worm the value of a currency.Just some factors that have nothing to do with the power of arms. Not to ommit that wars need money too.

Demand for "dollars" is nothing more than demand for "vouchers redeemable for US products" (or any other currency/country for that matter). Currency is indeed not a commodity in itself but rather can be seen as an "average commodity". This is why standard demand-supply analysis also works. I see of course your point in that currency is a very political matter but I don't think that it makes a difference. The same analysis works, for example, when governments give subsidies to specific industries. Or import tariffs in the other direction.Now, having the dollar as a currency guarantees that there will be a demand for US products. Effectively, foreign countries who keep these reserves are forcing a minimum demand for US products. Changing the reserve currency, means down-shifting demand. Does this make sense?

QuoteOriginally posted by: QuantVaderDemand for "dollars" is nothing more than demand for "vouchers redeemable for US products" (or any other currency/country for that matter). Currency is indeed not a commodity in itself but rather can be seen as an "average commodity". This is why standard demand-supply analysis also works. I see of course your point in that currency is a very political matter but I don't think that it makes a difference. The same analysis works, for example, when governments give subsidies to specific industries. Or import tariffs in the other direction.Now, having the dollar as a currency guarantees that there will be a demand for US products. Effectively, foreign countries who keep these reserves are forcing a minimum demand for US products. Changing the reserve currency, means down-shifting demand. Does this make sense?I tend to disagree. Demand for dollars is not necessarily demand for products produced within US if this what you mean. An agent may hold dollars, thus expressing demand for dollars, because he will need it to exchange it with Saudi oil, African timber or coffee or cocoa, Ukrainian cereals, Brazilian sugar, Chinese steel and so on. Nothing US produced, even if a US firm is involved in the overall trade process. Or an agent may keep his savings in dollars as it is perceived a safe store of value, wealth and purchasing power, especially in his local currency. A declining dollar on the other hand, may spur demand for US products since their price in terms of local currency, becomes more attractive. Furthermore, products that before were cheaper to produce abroad and import into the US, can now be produced competitively within US.

Anthis is quite right about the issue of dollar-denominated global commodities. And there is also the dollar demand inherent in dollar-denominated international debt in which lenders prefer to lend (and be repaid) in USD.The strength of the USD is in the large array of potential uses of USD -- the USD has the highest level of optionality of all currencies and thus has more value to more people in the world. To the extent that the USD loses reserve status, it will decline in value because fewer people will need USD for global trade and lending.

Dollar's status, as an international settlement/reserve currency, is supported by (1) strong US economy (e.g. have strong say in world economy), (2) credibility of its government (i.e. be responsible when printing money) and, to some extents, (3) its military strength (e.g. the ability to protect its interests in "volatile" environment). If some of these elements become relatively weaker compared with other countries, $'s status will be endangered.

QuoteOriginally posted by: AnthisWell, i dont see significant fluctuations from current levels (1.4USD/EUR) over the next months. But I wouldnt be surprised to see the rate exceeding 2, over the next 2-3 years.Without any change in the world geo-political order and with te US economy recovering?By my perspective the EUR/USD is well above intrinsic value. If it goes to 2 then the world will be flood by US products and services and unemployment will rise in Europe. Also, the prices of goods in the US are becoming extremely cheap for EU citizens. If the EUR/USD goes to 2 everybody in Europe should try to relocate to the US.Even with current EUR/USD rate I feel I would be much better living in the US than in Europe. From eggs, to fuel, to real estate everything is much cheaper in the US relative to my shity southern EU country where wages are really low. But we have the german's fx purchase power... Economically, it would be rational for everybody here to relocate to the US.Anyway, I get your point. Technical analysis shows some weakness on the USD vs. the EUR and the shity correlation between the EUR/USD and the stock market & commodities is making traders to push the fx rate to nonsense levels on an economics basis.I'll never get this shity correlation invented by speculators. If any, I think the correlation should be the inverse! I hope fx traders can bring the rate to equilibrium after these inefficiencies across asset classes are fixed.