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How come the dollar keeps falling?

This week, dollars seem to be on readers minds. Tayeb in Algiers wants to know why the dollar is falling — even though the U.S. economy remains fairly healthy. Joseph in California has a different problem: He just ran over $500 in cash with his lawn mower and wants to know how to salvage it. The Answer Desk, by's John W. Schoen

This week, dollars seem to be on readers minds. Tayeb in Algiers wants to know why the dollar is falling — even though the U.S. economy remains fairly healthy. Hugh in Maryland figures all that gold in Fort Knox should help. And Joseph in California has a different problem: He just ran over $500 in cash with his lawnmower and wants to know how to salvage it.

Why is the strength of the GDP not reflected by the dollar?
Tayeb C., Algiers

One reason is that, lately, the nation's gross domestic product hasn’t been showing a lot of strength. The most recent numbers, released Friday, show the U.S. economy expanding just 1.3 percent in the first quarter of this year.

But the dollar’s slide has been going on now for years — roughly since the U.S. emerged from a brief recession in mid-2001. Between then and the most recent quarter, GDP averaged a respectable 2.9 percent.

During that same period, depending on what currency you use for comparison, the dollar was getting hammered around the globe. Measured in euros, the currency used by the only  economy roughly the same size as the U.S., the dollar has fallen more than 50 percent from its peak in October 2000. And the dollar is near a 26-year low against the British pound.

While it’s true that the strength of a country’s economy is loosely connected to the value of its currency, a lot depends on where that economic growth is coming from. And the U.S. economy is now largely dependent on American consumers buying things, not making them. Consumer spending accounts for about 70 cents of every dollar of U.S. GDP.

Because much of what we buy comes from other countries, we send more dollars than goods to most of our trading partners. In other words, dollars have become our biggest export. Like everything else, as supply goes up, demand goes down; the more dollars we send overseas, the less they’re worth in the countries we send them to.

A weak dollar isn’t necessarily all bad. Sure, it makes it more expensive for an American tourist to buy a hamburger in Hamburg. But many American companies, workers and shareholders benefit from a weak dollar. For one thing, it makes American products cheaper when they land on store shelves in other countries; if your country's currency gets stronger in relation to the dollar, American products — priced in dollars — begin to look like bargains. And that helps American companies export more of what they make.

As American companies expand globally, that weak dollar also helps boost profits from overseas operations. When you bring profits earned in strong overseas currencies back home and convert them back into dollars, you get more bang for your bucks.

This isn’t the first time we’ve seen this movie: The dollar got hammered in the mid-1980s when Japan and Germany came on strong as global economic competitors. From March 1985 through December 1987, the dollar lost more than 50 percent of its value against the Japanese yen and German mark. But after Japan’s real estate and stock markets began to unwind, and West Germany absorbed East Germany’s sputtering economy, those currencies cooled down, and the dollar got back on its feet again.

Today, there are new forces weighing on the dollar. High oil prices, for one, aren’t helping. Because oil is typically priced in dollars, the rise in the value of each barrel means every dollar buys less oil. Cheap imports from emerging economies like China — while they stretch American paychecks and help keep a lid on inflation — are also soaking up dollars that have to be recycled faster.

Where does all this go from here? Sorry, we gave up on our crystal ball when it kept projecting that a two-bedroom condo in Florida would be worth $40 million by the end of this decade. Despite the insistence of gloom-and-doom bloggers that the dollar’s end is nigh, no one really knows.

A lot depends on how quickly the value of a currency changes; gradual moves can help smooth the impact of bigger changes in the global economy. It’s the sharp, sudden moves that cause problems. (See: Asia, circa 1997; Argentina, 2001.)

It’s also highly unlikely that the dollar will keep going down forever. The big question is: What will cause it to turn around? One possibility is that our government finally stops running huge budget deficits — which probably means raising taxes or cutting spending (or both). Another way to help the dollar would be to encourage Americans to put away their credit cards and start pulling more of those dollars sloshing around overseas back into their savings accounts.

The other alternative is to keep spending more than we have — and borrow the money from the people and governments that are accumulated our currency outside the U.S. But that route will be more expensive: we’ll have to pay every higher interest rates to prop up the value of those dollars and keep them flowing back home.

And that will raise the cost of every dollar we borrow — no matter where it comes from.

We have all that gold at Fort Knox. Why isn't our dollar more stable?
— Hugh G., Beltsville, MD

Turns out there isn't all that much gold left in Fort Knox. According to the U.S. Mint, there are currently 147.3 million ounces of reserves stored in the Fort Knox Bullion Depository in Kentucky. At current prices ($679 an ounce), that's worth a little more than $100 billion. That sure sounds like a lot. But as of this month, the U.S. money supply (based on the Federal Reserve's so-called M2 measure, which includes all U.S. currency, checking and savings deposits and money market mutual funds) stood at $6.47 trillion. At its high point in 1941, Fort Knox held 649.6 million ounces of gold.

Even if there were more gold sitting in the big vault, it wouldn't help the dollar much. The reason is that gold is priced in dollars, not the other way around. There was a time when the world’s major economies — Britain, the U.S., France and Germany — linked the their currencies to the value of a bar of gold. But starting with World War I, the “gold standard” began to unravel. There are a multitude of reasons — some of them fairly technical — but in the end, the increasing complexities of coordinating exchange rates proved unmanageable.

Though the major powers returned to the gold standard in the 1920s and '30s, the Great Depression, along with disagreements over tariffs, doomed the international gold standard for good. In 1946, the United States fixed the value of gold at $35 an ounce as part of a global agreement on exchange rates known as the Bretton Woods agreement.

But by 1971, rising U.S. inflation pressure  — largely caused by increased government spending and trade deficits — forced President Nixon to impose wage and price controls and end the U.S. policy of redeeming paper dollars for gold. Gold began trading on the open market — like any other commodity — where its price now fluctuates minute by minute based on supply, demand and the speculation of investors and traders around the world.

This is where we usually hear from that small but passionate group of readers who maintain that the real cause of the demise of the gold standard in favor of “worthless fiat currency” is an ongoing conspiracy by a group of shadowy, unelected figures at the Federal Reserve, the World Trade Organization and/or the International Monetary Fund. All of which may be true, but we’ve found no evidence to date.

But keep those e-mails coming.

With my lawn mower, I ran over one envelope with $500 and damaged all the bills. Who can help me to replace the damaged bills for new ones and how?
— Joseph D., Rosemead, Calif.

Don’t you just hate it when that happens?

It turns out the the good folks down at the U.S. Bureau of Engraving and Printing are ready to help out. And they’ve seen it all. Apparently, the most common causes of currency mutilation are  “fire, water, chemicals, explosives; animal, insect or rodent damage; and petrification or deterioration by burying.”

Even though lawn mowers aren’t on the list, the Treasury Department says you can exchange shredded United States currency for new bills of equal value as long as you have 1) more than half of a note “identifiable as United States currency” or 2) if you have less than half a note, “the method of mutilation and supporting evidence demonstrates to the satisfaction of the Treasury that the missing portions have been totally destroyed. “

If the bills are still in fairly decent shape, you may be able to exchange them for fresh ones at a local bank. If not, there are two ways to trade in your damaged dollars. If you happen to be in the vicinity of the Office of Currency Standards at 14th and C Streets in Washington,  (between 8 a.m. and 2 p.m., Monday through Friday except holidays) you can bring in what you've got left and they’ll take a look.

Otherwise, you need to write a letter explaining what happened and mail in whatever the mower left behind. You may want to shake out some of the grass clippings, but the bureau advises that you “do not disturb the (currency) fragments any more than is absolutely necessary." Besides, all that grass will probably help back up your claim. 

So bundle it up and send it by registered mail to:

Department of the Treasury
Bureau of Engraving and Printing
Office of Currency Standards
P.O. Box 37048
Washington, D. C. 20013

If you’d like to give them a call to let them know it’s coming, you can reach them at 1-866-575-2361.

And maybe next time, check the yard for wads of cash before firing up the mower.