The value of the dollar and you

Gallup Poll reports that in April 2008, 29% of Americans identified the declining value of the dollar as an economic "crisis".  This was second to 42% who identified rising gas prices, roughly the same for healthcare costs and problems in the housing market, and more than rising food prices, a drop in real wages and job losses.  Gallup emphasized that this concern was not about inflation but about the dollar exchange rate against other currencies:  "However, given that Americans rarely seem to focus on international economic issues, it is somewhat surprising that the declining value of the U.S. dollar receives the second-highest percentage of "crisis" mentions (29%)."
        It is surprising because no matter which way the dollar swings, it will hurt some groups and delight others.  Winners and losers will switch when the pendulum swings the other way.  Because of this shifting balance of winners and losers, politically, the issue is usually a wash.  For example, traveling overseas or buying imports becomes more expensive.  But our goods become relatively cheaper and easier to sell.  This supports jobs and growth in any business that sells goods or services abroad.  Also, seemingly wide variations from expected or "normal" exchange rates seem to self-adjust over time.  The current dollar exchange rate is identified as a "crisis" because it is correctly perceived as making a high-profile pocketbook issue worse.  A weak dollar is probably contributing to the high price of gas.
        The dollar is said to be relatively weaker than other popular currencies - especially the Euro - because it takes more dollars to buy (exchange) those units of foreign currencies than it did before.  As with any other commodity that can be  bought and sold, the easiest way to understand the price or exchange rate of a currency is in terms of supply and demand.   
        The exchange rate between one currency and another is the reflection of a running popularity contest.  The availability of cool and necessary things to buy that are priced in a currency will make that currency more valued relative to another. Inflation in the home country of a currency will make that currency less desirable. Lower interest rates in the country will make investment returns (from bonds, CDs, treasury bills) lower - a big reason for capital to "flee" from a currency. Perceptions of the strength of an economy in general will be reflected in the exchange rate of a currency. 
        For generations, the strength and size of the American economy has made US Treasury bills, bonds, and notes the most popular place to park cash in the world.  These T-bills are IOUs of the US government.  The US has never defaulted on interest or principal payments on any of its debt.  US credit is so high that T-bills are referred to as "risk-free".  The allure of such an investment has made it possible for the US to borrow almost without limit - and it has.  The national debt – the dollar amount of those IOUs – was $9.3 trillion in May 2008. 
        It is easy to imagine from a common sense point of view, that a lender might finally decide that it is too risky to lend that sweet guy any more money.  The exchange rate may be a reflection of some reluctance to lend.  Another reason not to lend is that Interest rates are being artificially battered down by the Fed. The returns will be higher somewhere else.  Grain, movies, Boeing jets and US debt are some of the coolest things we sell.  So lower interest rates and doubts about US debt are reasons NOT to exchange Euros for dollars, and our dollar's popularity sinks.
        One class of assets that may have higher returns when interest rates are low is commodities. Commodities are products that may be nature-based like precious metals, grains, unprocessed foodstuffs ... and crude oil.  The undifferentiated product is sold in very large units called contracts.  The contracts are packaged in many ways into securities and are bought and sold every day on commodities exchanges.   
        The three usual reasons to buy these securities are to hedge, to invest, and to speculate.  Hedging is done by the actual customers of the product: food processors, factories, mills, oil refineries.  In a volatile marketplace, these manufacturers need to protect their supply and they need to be able to depend on a stable price over a defined period of time.  They can do that with these contracts.
        Wealthy investors keep a broad portfolio of investments that vary in the degree of risk and expected rate of return. CDs and  other interest-bearing accounts are relatively low risk with a low rate of return.  Individual stock holdings or mutual funds  would be expected to yield more but are riskier.  Commodity accounts are among the riskiest investment holdings and can yield fantastic returns.  But the overall investment strategy of broad holdings of varying risk is tried and true.  Right now, interest bearing accounts in dollars are not especially appealing.  Just by comparison, commodity offerings are more  attractive.  This extra attention and demand is enough by itself to increase the price of commodities like oil.
        Speculators gamble on hunches of particular prices going up or down over a short period of time.  Speculators are responsible for huge amounts of money going in and out of the market.  This can make price movements dramatic and unpredictable over that narrow time horizon.
        There is another reason for an increase in the price of oil.  Because of the historical soundness of the dollar and the gargantuan size of the pool of dollars, crude oil is priced and traded in dollars on the international market, even among trading partners that are not American.  But the dollar is now weaker relative to the currencies of these international trading partners in oil.  To make up for the relative lost value of the dollar, the price of oil - in dollars - must rise to reflect the value of the oil traded, even if the trade is not with Americans.
        The value of the dollar reflected in international currency exchange rates is a legitimate concern for American consumers.  It makes all imports, and especially oil, more expensive.  And the price of oil, in particular, makes the price of everything that is transported by oil-burning engines more expensive.
        The remedies for a weak dollar are well-known but come with their own hazards and contradictions.  Indicators of a strong  economy - rising GDP, declining unemployment, shrinking inventories - will restore confidence in the dollar.  A smaller outstanding debt usually helps to increase someone’s credit-worthiness and their appeal as a borrower.  Allowing interest rates to rise would bring capital flooding into US securities, thereby strengthening the dollar.  Having cool stuff for sale at attractive prices would be a reason to acquire US dollars.  But, There Is No Such Thing As A Free Lunch.  Every one of these  "remedies" comes at a price.