Video:What's the Measure of the Value of the US Dollar?

SHARE ON                

Transcript:What's the Measure of the Value of the US Dollar?

The dollar's value can be measured by exchange rates, Treasury notes and the amount of dollars held by foreign countries. These three measurements usually are in sync with each other.

The Dollar Value Is Measured by Exchange Rates

The U.S. dollar is most easily measured by its exchange rate, which compares its value to other currencies. Currency exchange rates allow you to determine how much of one currency you can exchange for another. Exchange rates change every day because currencies are traded on the foreign exchange market, known as forex. A currency's forex value depends on a lot of factors, including Central Bank interest rates, the country's debt levels, and the strength of its economy. Most countries allow their currencies to be determined by the forex market. This is known as a flexible exchange rate.

In 2010 the dollar first rose 17% against the euro (during the period of January 1-June 7) due to the EU debt crisis. By December, concern about the growing U.S. debt drove it back down eleven percent.

The Dollar's Value Is Measured by Treasury Notes

The dollar's value is usually in sync with demand for U.S. Treasury notes. The Treasury Department sells notes for a fixed interest rate and face value. Investors bid at a Treasury auction for more or less than the face value - and can resell them on a secondary market. High demand means investors pay more than face value, and accept a lower yield. Low demand means investors pay less than face value and receive a higher yield. That's why a high yield means low dollar demand - until the yield goes high enough to trigger renewed dollar demand. Over the long term, the value of the dollar is weakening as measured by both exchange rates and by Treasuries thanks to the $13 trillion U.S. debt.

Value of the Dollar as Measured by Foreign Currency Reserves

The dollar is held by foreign governments who have an excess of cash, which they hold in foreign currency reserves. This excess happens when countries, such as Japan and China, export more than they import. As the dollar declines, the value of their reserves also decline. As a result, they are less willing to hold dollars in reserve. They diversify into other currencies, such as the euro. This reduces demand for the dollar, putting further downward pressure on its value.

Thanks for watching. To learn more, visit About.com