I am trying to understand the reasons for the recent declines in the
dollar. I am living in South Korea and the central bank here has been
cutting interest rates while the Fed has been raising them. Also
employment figures here have been bleak while figures in the US seem
to be getting slightly better. I would imagine that these two factors
would lead to a stronger dollar relative to the South Korean Won.
However, the Won has reached record lows since 2000 today.

One article I read credited the weak dollar to the current account and
budget deficit that the US is running up. I've taken some intro level
economics classes, but have a hard time understanding why these two
factors would affect the price of a currency. Could you please explain
this and any other potential factors in the weak dollar? Many
thanks...

The basic issue is that the United States needs to boost growth in
order to address both its budget deficit and its current account
deficit.  One way to do this would be to have a weak dollar.  Not only
would this boost the competitiveness of American exports, but domestic
consumers would have to pay higher prices for imported goods, which
would encourage domestic production and reduce the current account
deficit by decreasing imports.

According to Bloomberg, the United States must take in $1.8 billion
daily from foreigners to compensate for the current account gap and
prevent the dollar's value from falling.  There is some concern that
this level of indebtedness to foreigners simply cannot be maintained,
which would result in a fall in the dollar.  Asian countries in
particular are maintaining large current account surpluses, and in the
case of Asian countries whose currencies are free to float, are
experiencing increases in the value of their currencies with respect
to the dollar as a result.

Because significant risk exists that the United States' economic
position is unsustainable and that the Bush administration is unlikely
to intervene to strengthen the dollar, currency traders are responding
by lowering the dollar's value, particularly with its trading
partners.

Sincerely,

Wonko

Source: "Q&A: The Weak US Dollar" by Mark Tran, Guardian Unlimited
(November 8, 2004) http://www.guardian.co.uk/theissues/article/0,6512,1344718,00.html

Kim --

Wonko-GA's done a good job here.  The Wall Street Journal ran a good
front-page article recently on the topic too:
"Bush Policy: Talk a Strong Dollar But Let It Slide
--
Tacitly Approved, Decline In Currency Aids Trade Gap While U.S. Works on Yuan
--
Page A1, Wall Street Journal, November 10, 2004


The Journal's done a good job of covering all aspects of the dollar's
decline, which began in early 2003 before the Iraq War.  You might
wish to do a search at http://www.wsj.com for recent articles, which
detail how industries and investors are reacting to it.

Best regards,

Omnivorous-GA