Dollar Value After the United States Increased Its Saving

Subject: Finance
Pages: 2
Words: 322
Reading time:
2 min

Explaining the aforementioned, we might go to the opposite, where it can be said that the falling price of the US currency might be caused by increased spending and decreased saving. In that regard, this situation means that the government is borrowing money, and thus the supply increases while the interest rate is falling. Accordingly, the differences in prices were selling US assets and buying international assets led to that the demand for the US dollar is falling, and thus its price becomes cheaper.

Going to the opposite, the increased savings and decreased spending will mean that the government will borrow less and rely on its own reserves, and thus the interest rate is growing within the country. Accordingly, the US assets will become more expensive for the foreign market, and in that regard, foreign assets will become cheaper for the US. Additionally, it should be stated not only might this factor affect the dollar in the world market, but also the decrease of imports and the increase of export.

A simpler explanation might also explain McKinnon’s suggestions. This explanation basically relies on money supplies, where increasing saving and decreasing spending will lead to that there is less circulation of the currency. Accordingly, the less are dollars in circulation, the more the dollar is valued. The currency, in general, is “a balance sheet… which value is derived from the assets held by the Federal Reserve and commercial banks, some of which, like gold, are real and tangible, and some, like bank loans, foreign currencies, and derivatives, are not.” Thus, when the balance implies that the Federal Reserve stops the supply of the currency, or decreases it, while the other side of the equation, such as assets and bank loans, foreign currencies and derivatives remain the same or increase, that leads to that the value of the currency as a balance sheet increases.