There’s been a lot of speculation about the future of the American dollar and how other currencies’ strength will fluctuate. Some predict that the dollar’s reign is coming to an end, which leads to suggestions about what shifts in currency dependence will mean for the global economy. Here is a look at the recent life of the dollar and what appears to lie ahead.

A Gradual Weakening

Over the last decade, the dollar has lost almost a third of its value. In April, The Wall Street Journal reported on how worries about inflation, the federal budget deficit, and low interest rates have undermined the United States currency.

In March, a WSJ article discussed why the dollar isn’t as strong as it once was. According to the article, part of the dollar’s decline can be attributed to developments in technology. As technology changed so many industries within our global society, so too did it change the way people treat transactions. Now it’s possible to compare different currencies and prices in real-time instead of simply relying on the dollar. This has opened up room for more than one currency to become a major player in the currency market.

Add to this the competition of the Yuan and the Euro and the fact that the dollar might not be as “safe” as it used to be because of the United States’ major deficit, and you’ve got an explanation as to why the dollar is still suffering.

A Pause in the Decline

While the Euro is a major competitor, its recent struggles have caused a temporary reprieve for the dollar that has lasted throughout the end of 2011. According to an article in CNN Money, the financial problems in Europe and policy makers’ slowness in addressing the crisis leads some to believe that the Euro Zone might find itself in a recession.

Due to the concerns over the financial state of Europe, some investors have turned back to the greenback out of fear that problems will only get worse for the Euro. This has contributed to the dollar’s minor spike in strength, but there are other causes, as well. (In the dollar index chart above, you can see the state of the dollar as of Dec. 23).

There’s a lot of debate over the future strength of the euro and whether it will succeed in rising as a powerful international currency or collapse due to economic problems and the lack of action being taken to solve the debt crisis in Europe.

The Grim Predictions

Despite the upturn the dollar has experienced in recent months, some experts say that this is only a temporary strengthening and is bound to fade back into an overall trend of weakening. Even if people still flock to the dollar because it’s “safe,” some argue that the problems mentioned in the previous sections are too strong to not have a long-term influence.

According to an article from Kitco News on Forbes, the fate of the dollar in 2012 depends at least partly on the European financial issues and the strength of the euro, as the recent dollar strength has been due to fear about the euro’s status. The chief global economist at Decision Economics, Allen Sinai, said he thinks the dollar will follow the economic condition of the U.S. rather than continue to strengthen.

Conclusion

There are many theories about the fate of the U.S. dollar — some maintain optimism, but many are bleak due to the suffering economies in the United States and in other parts of the world. Regardless of the dollar’s outcome, it’s probably safe to say that the state of the American economy will play a huge role in how things play out.

If you’re making investments, it’s important to stay ahead of these market changes. With UFXMarkets daily market review you’ll stay one step ahead of the curve.

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