Introduction


Today, virtually every country in the world is affected by what happens in other countries. Some of these effects are a result of political events, such as the overthrow of one government in favor of another. But a great deal of the interdependence among the nations is economic in nature, based on the production and trading of goods and services. One of the most rapidly growing and changing sectors of the U.S. economy involves trade with other nations. In recent decades, the level of goods and services imported from other countries by U.S. consumers, businesses, and government agencies has increased dramatically. But so, too, has the level of U.S. goods and services sold as exports to consumers, businesses, and government agencies in other nations. This international trade and the policies that encourage or restrict the growth of imports and exports have wide-ranging effects on the U.S. economy (Dunning 1999).


 


As the nation with the world’s largest economy, the United States plays a key role on the international political and economic stages. The United States is also the largest trading nation in the world, exporting and importing more goods and services than any other country. However, some people worry that extensive levels of international trade may have hurt the U.S. economy and U.S. workers in particular. But while some firms and workers have been hurt by international competition, in general, economists view international trade like any other kind of voluntary trade: Both parties can gain, and usually do. International trade increases the total level of production and consumption in the world, lowers the costs of production and prices that consumer’s pay, and increases standards of living. How does that happen? All over the world, people specialize in producing particular goods and services, then trade with others to get all of the other goods and services they can afford to buy and consume. It is far more efficient for some people to be lawyers and other people doctors, butchers, bakers, and teachers than it is for each person to try to make or do all of the things he or she consumes (Dunning 1999).


 


In earlier centuries, the majority of trade took place between individuals living in the same town or city. Later, as transportation and communications networks improved, individuals began to trade more frequently with people in other places. The industrial revolution that began in the 18th century greatly increased the volume of goods that could be shipped to other cities and regions, and eventually to other nations. As people became more prosperous, they also traveled more to other countries and began to demand for new products they encountered during their travels. The basic motivation and benefits of international trade are actually no different from those that lead to trade within a nation. But international trade differs from trade within a nation in two major ways. First, international trade involves at least two national currencies, which must usually be exchanged before goods and services can be imported or exported. Second, nations sometimes impose barriers on international trade that they do not impose on trade that occurs entirely inside their own country (Das 1993).


 


This research paper intends to determine the reasons for the expectations that the dollar will experience a downfall in 2005; this research paper also intends to determine the reasons why those expectations did not happen. Lastly,  this paper intends to determine what likely the course of the value of the dollar is over the next two years and why the dollar is expected to take this course in the next few years.


 


Dollar and its expected downfall (First Question)


One of the reasons why the dollar was expected to fall in 2005 is its growing account deficit. As mentioned in an article by Edwards (2005), many analysts in academia, the private sector, and applied research institutions express increasing concern about the growing U.S. current account deficit. There is a general sense that current global imbalances are unsustainable and that adjustment must come sooner rather than later. The unprecedented magnitude of the U.S. current account deficit and the United States’ growing net foreign indebtedness have fueled these worries, with many analysts arguing that, unless something is done, the world will move toward a major financial crisis. The account deficit put some doubt if the dollar will continue to have its domineering power, this lead to the speculations that sometime in 2005; the US dollar will experience a downfall. Investment Adviser (20 December 2004) gave reasons for the expectations that the dollar will go down. These include US’s expansion and recovery and the Bush Administration has not been averse to a weak dollar because it has boosted the industrial heartlands where sentiment was beginning to suffer. These factors contributed to speculations that the dollar will go down. These factors contributed to the market scare that put the US dollar in the brink of downfall. Moreover, a reason for the expectation that the dollar will go down is the political problems the US has. The US government had to take care of its internal problems thus the economy and its finances were neglected thus the problems on this sector was fixed. Lastly, a reason for the expectation that the dollar will go down is the situation in Iraq that the country is currently facing, this also took some of the government’s attention on the economy.     


 


Reasons why the downfall did not happen (Second Question)


The reason why the US dollar did not experience a downfall as expected was the market grew tired and unmindful of such stories. The market started to lose care and lose interest in such situation that the speculations died down thus the dollar did not experience downfall. Another reason why the US dollar did not fall is the changes that happened to the world economy. The currencies of other countries have gone down due to different reasons, this reasons include political ones and other internal problems that these countries have. Because of the decrease in the value of other countries currency, the US dollar gained some of its strength thus the downfall did not happen. A reason why the US dollar did not experience the expected downfall is the different methods done by the US government to recover from such problem.  The US government extracted all the things it can do to remove such speculations and doubts about the US dollar. The US government also did its best to use all its resources to maintain the status of the dollar. Furthermore, a reason why the US dollar did not experience the expected downfall is because the government tried to fix and solve all the deficits they have. This brought back the confidence in the currency.  Lastly, a reason why the US dollar did not experience the expected downfall is due to some ease regarding the situation in Iraq. The situation in Iraq forced the government to lose its focus on its economy. The situation in Iraq also caused some lost of interest and lost of value of the currency. Since the situation in Iraq is little by little dying down, the focus of the government is back in the economy and this lead to renewed interest in the currency. The Iraq war affected the country and gave them other related problems. Once the said situation slowly calmed down, the different problems were given solutions and the country was able to return things to normal.


 


The dollar over the next two years (third question)


The dollar had a tumultuous couple of years. It experienced some highs and lows. It encountered a situation wherein experts expected it to go in a downfall. Over the next few years, the dollar might still be having up’s and down’s and it may continue to be in the brink of downfall. The factors that caused it to experience its downfall and rise may be the same factors that will give the currency problems or benefits. Over the next few years, the dollar may experience a period of recession because it has experienced such things in the past and it might happen once more in the future. Over the next few years, the dollar’s competitor in the form of other currency can increase. Every country is trying its best to have the same status as the US and their currency in the future may be the ones that can compete head to head with US dollar. Lastly, over the next few years, the US may lose its dominance in the world currency because of the wrong management done by its future leaders. This could create many openings for different kinds of country.


 


Conclusion


Every country in the world is affected by what happens in other countries. The downfall in the currency of a country can be experienced by others. The US is not an exemption of this event. In 2005, people expected that the US dollar will experience a downfall.  One of the reasons why the dollar was expected to fall in 2005 is its growing account deficit. Another reason is the US’s expansion and recovery and the Bush Administration has not been averse to a weak dollar because it has boosted the industrial heartlands where sentiment was beginning to suffer. Moreover, a reason for the expectation that the dollar will go down is the political problems the US has. Lastly, a reason for the expectation that the dollar will go down is the situation in Iraq that the country is currently facing. The expected downfall did not take place due to different reasons discussed. The US dollar might continue to encounter such problems and it might get worse depending on what the government will do to prevent it. The US dollar affects the world currencies and its downfall or rise can affect the currency of the world.


 



Credit:ivythesis.typepad.com


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