Weakness of US dollar continues to dominate Forex news. It is even more prevailing than the recent surge of currencies like the Australian Dollar. In fact, strong market response to Reserve Bank of Australia decision to raise interest rates as the first one of major economies, appears to be what brought the Dollar talk to the forefront once again. Great debate rages what is more important- strong dollar, presumably good for the global trade, or a weak one, in theory benefiting US manufacturers, thus speeding up American recovery.

After prolonged time of silence on the subject, official US position was voiced last week. Larry Summers, chief economic adviser to the White House as head of president’s National Economic Council said on Thursday that United States is committed to strong dollar policy. A little earlier it had been Treasury Secretary Timothy Geithner making similar remarks. Unfortunately, any such talk coming from him seems nothing more than a lip service. That’s precisely what he said few months ago during his visit to China, where he assured his hosts about safety of their investments in US. Since then, the Dollar has been in a steady downfall.

The Dollar Index experienced steep decline this year. After the turmoil of 2008, money has been shifting from away from USD. Index fell under 76 level, very close to an all time low of 72. Hardly a picture of policy in support of “strong dollar”. Current officials are not the first ones repeating this phrase, in spite of markets proving them to the contrary. Since the mid 1980′s everybody in the White House, as well as all holding important, finance related posts, have been reading the same, well worn script. Sadly, very long term chart of the Dollar Index also proved them wrong.

US Dollar has been in decline against a basket of foreign currencies represented by this index for about 25 years now and is on the verge of making new all time low. Perhaps most disturbing is the notion floating around, that US government is allowing the Dollar to erode on purpose, debasing the currency, in order to pay off enormous debt, which just keeps piling on. Critics argue that it has become virtually impossible to ever repay these obligations at anything resembling today’s value, and gradual debasing of USD is the only way to do it over long time. Value of dollar has dropped dramatically before, after war induced debts of Civil War, WW1 and WW2. Current level of debt is the highest ever outside of time of all out wars.

(published by DollarDaze.org, with data compiled by MeasuringWealth.com).

Seen from this perspective, it seems that current downtrend of US Dollar is simply a continuation of an extremely long trend of falling value. Comments by financial authorities appear to be nothing but a damage control, the way it is used by politicians. Even FED Chairman, Ben Bernanke, was in on the action. Seeing market’s response to what happened in Australia, he remarked that eventually, when the economy had recovered enough, the Fed would tighten monetary policy to head off inflation. Of course, just couple of weeks ago, he promised to keep rates at bottom levels for the foreseeable future. One, two more years? That’s hard to tell, but certainly for long enough to give the Dollar Index plenty of time and opportunities to make new all time low.

Mike K.