[s_wilwerding]

It's often difficult to think of dollars as a commodity, and it's difficult to think of the "worth" of a dollar.

The best example I could think of is to assume that every person who sold something on eBay got paid in Euros. Right now, since the euro is worth more, it may not be a bad idea to keep the money in euros instead of converting it to dollars. It also may be worthwhile to use those euros to buy debt in Europe, which might have a higher interest rate than those in America.

But suppose at some point that people couldn't buy foreign debt and decided they just wanted to convert the euros to dollars. If enough people do this all at one time, the "value" of a euro will go down, because no one will want to own euros and consequently, the euro will fall in value relative to the dollar.

This is essentially what is happening in the world market, except with dollars. America buys far more than we sell abroad, and we pay for imports with dollars. That means all those people around the world are getting dollars instead of whatever currency they use. For a long time, foreigners were using those dollars to buy US debt, which was safer and returned a higher rate of interest than they could get at home. Eventually, though, the world got flooded with dollars, and since our interest rates are now so low, foreigners are no longer buying as much US debt, and they are dumping their dollars for foreign currencies, which is pushing the value of the dollar down.

If our interest rates were higher, there would be less dumping of dollars, and the dollar would appreciate against other currencies. The flipside of this situation is that products that were made with dollars are cheaper to foreigners, which is why you are starting to see our trade deficit come down. It is mostly a self-balancing system - if our currency isn't "worth" as much as yours, it's cheaper for you to import from us, and so our trade deficit goes down, there are fewer dollars being converted to euros, etc., and the value of the dollar goes back up.