On thing everybody agrees on when it comes to discussing the dollar is that it is bound to fall. The top reason is the soaring US budget deficit that hit $412.5 billion this year. High oil prices hovering around $50 a barrel also weigh heavily on the US economy, as well as the current account deficit predicted to surge to 6.4% of the Gross Domestic Product, up from the today’s 5.5%.

American currency plunged to $1.3335 for euro Tuesday, setting a new record. The weak dollar drives import costs up and simultaneously reduces the cost of the US exports lending support to the domestic economic recovery.

Euro rise has caused frustration among European economic policy makers struggling to keep up the sluggish economic growth in their countries. While domestic demand remains well below the desired level, the expansion has to rely on exports that are appreciating with respect to the dollar-denominated goods.

European Central Bank president Jean-Claude Trichet has voiced his indignation about the euro rise against the American currency a number of times naming it “unwelcome” and “brutal” that gave rise to linguistic speculations on whether he was misusing the latter aggressive term misled by the analogous French term. The verbal aggression however is not supported by the intervention in the forex market on the part of the ECB.
US Treasury Secretary John Snow has given clear indication that despite US voiced commitment to the strong dollar policy the American government leaves Europe to fight the rise of the 12-nation currency on its own. The European rulers, in his view, need to adopt more “pro-growth policies”.

Trichet seemed to appreciate US proclamations when saying "I have confidence in the capacity of the friends on the other side of the Atlantic . . . to deliver over time the substantial reduction of the fiscal deficit.”
In the meantime, Americans living abroad are affected by the swift depreciation of their currency, and the US troops stationed in Europe will receive an increased sustenance staring this week.

Dollar declined has added strength to other currencies. The British pound is at its highest against the dollar since September 1992, gaining 4.4% in the past month, and reaching its highest point since George Soros won a $1 billion bet that the UK would fail to maintain its peg against European currencies.

``Certainly for many people looking for an alternative to the dollar the pound is quite attractive,’’ said Jim O’Neill, head of global currency research at Goldman Sachs Group Inc. in London. ``The U.K. has the most stable and fundamentally strongest economy in the G-7.’’

The pound traded at $1.9181 yesterday and analysts do not exclude the $1.95 exchange rate. British economic expansion seems to be slowing down as economic indicators show a 0.4% increase in the third quarter down from 0.9% in the second quarter.

The dollar fall can also be reflected in the US Treasury bond prices. So far Treasuries have demonstrated stability against the Fed rate hikes that have been going on since June, but Monday bond quotes dipped, and the yield to maturity on 10-year bonds has risen to 4.33% from 4.22%.

The drop was conditioned by the decrease in the Treasury bond purchases by the Asian governments. Although the reductions in purchase volume have been relatively, the significant proportion of the Treasuries that are scooped up by Asia is likely to have an impact on their prices. In September the volume of Japanese investments in the US Treasuries has dropped for the first time since October 2002 and now equals $720.4 billion compared to $721.9 billion in August.

Dollar weakness will probably reduce the attractiveness of dollar investments, and a number of central banks including the Bank of Russia have expressed a desire to reduce the proportion of dollars in their foreign currency reserves.