For decades the dollar has been the benchmark currency throughout the world thanks to the United States’ thriving economic enterprises and stable central government. Despite still being the global reserve currency, the dollar has been knocked around over the last decade. The dollar has lost nearly 20 percent of its value since 2001, and the trend doesn’t seem to be reversing anytime in the near future.

One of the main culprits in the dollar’s decline is the astronomical amount of US debt; currently it is at a historic high of nearly $12 billion. High debt levels create a lack of confidence in US government and industry among the rest of the world, which means that the dollar is less prized among investors and governments. All governments—legitimate ones at least—keep reserves in a variety of different currencies to safeguard against any one denomination losing too much value. Over the last century or so, the US dollar has been the currency of choice for practically all foreign reserves, but this trend of blind faith in the American in economy is waning.

Another main contributor to the meekness of the dollar is that fact that the Federal Reserve has interest rates nearly at zero, which means that money is “cheap”. When people can borrow money while being required to pay virtually no interest, it obviously devalues the currency.

Recently, the euro has emerged as a new predominant currency, thanks in large part to the many nations that are members of the European Union. With more countries prepared to become members and enter into trade agreements with the EU, the euro should only continue to gain strength. A currency’s “strength” is always compared relative to the world’s other currencies; consequently, a high value for foreign currency is disadvantageous for the dollar.

Another measuring stick for the dollar is the demand of bills, notes and bonds that are issued by the US Treasury. When the yield for these notes increases, the value of the dollar falls. When the economic crisis first hit, the value of these Treasury Notes plummeted. Since the first of the year however, the yield on the Treasury products has greatly increased, correlating to a relative loss in value of the dollar.

There is virtually always a negative correlation between the value of the dollar and the price of commodities. Traditionally, one of the best gauges of the dollar is the price of gold, and it seems that everyday gold prices reach new record highs. As of this post, gold is trading at over $1,100 an ounce, and is only expected to go up from here. A weak dollar means that raw goods, like oil for example, have more inherent value in the markets. The current rally in the stock markets may also be a derivative of a weak dollar, as investors view stocks as being undervalued.

There is much debate over which variable, the weak dollar or soaring stock and commodity prices, is the cause of the current trend. Those who claim that a weak dollar has caused the recent spike in stocks and commodities have a pessimistic outlook on the fate of the latest rally. If this is the case, it could be an indication that we will likely experience widespread inflation and lose our standing as an economic powerhouse in the world in the future. Generally a small amount of inflation is viewed as constructive for an economy, especially in down economy. When a currency loses too much value in a short period of time however, it can lead to a collapse of the financial sector and the overall economy.

Many experts, on the other hand, believe the dollar is getting weaker as a result of increased investing in stocks and commodities, and is the effect rather than the cause in the equation. This scenario would be advantageous for the US, as it would indicate that investors’ worries over the tumultuous world economy have subsided and they are beginning to invest in a normal fashion.

“What’s really happening is that people are selling dollars and using that money to recycle back into stocks even though there are some concerns about the sustainability of the U.S. economy,” said Kathy Lien, the director of currency research at GFT.

A weak dollar has several consequences for the economy and our role in the global markets. Contrary to what many people may think, a weak dollar has several advantages when it comes to rekindling a struggling economy. Our exports are more affordable to foreign countries when the dollar is weak, which obviously makes are goods and services more attractive to the rest of the world, as well as our citizens. When the dollar loses value, it in turn costs more for us to import goods as well, which also promotes more at home spending.

This could create long term problems, however. As you can imagine, a prolonged period of weak currency could eventually turn into inflation, which is never beneficial. There is also concern that the rampant investing brought on by the weak dollar may create a new investment bubble.

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