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What is responsible for the daily rise and fall of the value of the dollar?

Name: Norman Kautsky
City & State: Centennial, Colo.

Question/Comment: What is responsible for the daily rise and fall of the value of the dollar ?

Paul Solman: The DAILY rise and fall? As many factors as you can name. As in the market for anything that's bought and sold by millions of people, second to second, any rumor, factoid, whim, or event can cause a rise or fall. The great presumption of market watchers in that they KNOW which caused what. It's a presumption I would label "foolish."

Longer-term movements presumably reflect "fundamental" causes of value. In the case of a currency, as with anything else that's bought and sold, the fundamentals are supply and demand. The supply of dollars is determined mainly by how many are "created" by the Fed (see earlier posts of mine or look elsewhere on the Internet to be reminded how this happens).

The demand for dollars, meanwhile, depends on whether people want them - or things denominated in dollars like U.S. manufactured goods or stocks or Treasury bonds; want them, that is, compared to their alternatives, priced in other currencies (Euro goods, stocks or bonds, for example). That's long-term.

But short-term, who knows? Moreover, it's not even clear when short-term becomes long-term. Sorry if the answer's unsatisfying. At least, unlike so much of what "experts" will tell you about why markets move, it has the virtue of being true.

-- Posted September 18, 2008 | Comments (0) | Permalink