Crs Report for Congress

After a long and large appreciation, in early 2002, the dollar peaked and steadily weakened in value relative to other major currencies through 2004. In 2005 and through most of 2006, the dollar was essentially steady. At the end of 2006, however, depreciation resumed and it has continued in 2007. A weaker dollar will be good news for exporters and those who compete with imports, while consumers of imports will be correspondingly unhappy. Yet it is important to recognize that a falling dollar is symptomatic of the ebb and flow of international capital in and out of the American economy. Those flows will have important implications for domestic interest rates and activities sensitive to credit conditions, such as housing and business investment. The exchange rates movement will be strongly influenced by the effect of changes in interest rates on the flow of financial capital between countries. Also consider how the expected movement of future exchange rates influences investors now. Inflation, safe-haven and speculative effects, and the size of the trade balance can also be important. The central role of relative interest rates in generating international capital flows and exchange rate movements makes it important to understand the forces that move …