What drives the US dollar down ?

If not as stressed as India’s IT vendors and exporters, I am a little hassled. What drives the US dollar down so much?

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Ok. There you have a steep oil price, a weak economy and an anxious credit market - all helped dump the dollar. But America's growth prospects are not so poor and the subprime-mortgage market not so woeful—at least, not yet—that they can fully explain the dollar's recent sickliness. My basic understanding of economics tells me a currency of a country that has an adverse balance of trade will be weak.

But a closer look suggests that currency markets, rightly or wrongly, are blithe about trade imbalances. Some of the countries whose currencies have gained most at the dollar's expense, like Britain, Australia and New Zealand, have large external deficits and debts too. Australia's current-account shortfall has been more persistent than America's and, as a result, its net overseas debt last year was 60% of its GDP, compared with 19% for America. New Zealand's debt ratio is larger still at 90% of GDP. Meanwhile the currency of the world's largest creditor nation, Japan, continues to languish—even against the dollar.

If anxiety about global imbalances is not driving currency markets, perhaps the dollar might rally once America's economy is back on its feet. It has, after all, fallen a long way already: on the Fed's broad trade-weighted index, the greenback is down 22% since its peak in 2002. According to the purchasing-power parities calculated by the OECD, the dollar is undervalued by 15% against the euro, 18% against the Australian dollar and 21% against the pound. Such divergences from fair value might not prove sustainable, particularly for the countries that have external financing gaps of their own to fill.

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