The US dollar has been under downward pressure in international currency markets for more than two years. What would be the future direction of the dollar and how will the major currencies fare, especially the euro?

The floating exchange rate system came into force in 1971 with the US dollar as the most dominant currency of the world. Till date, the US dollar is the reserve currency of the world in spite of the massive blow of September 11, a momentary decline of its exchange rate and a mild recession in the US economy. But, for the last two years the reserve currency (US dollar) of the world has been in deep trouble as it has been declining against major currencies. The euro has gained almost 39% against dollar in the past two years and is likely to a gain around 10-20% more against dollar over the next year. The dollar has recently dropped to a three-year low against the yen. It has also fallen in recent months against British pound and many other currencies.

This gives a signal that the US dollar is under intermittent downward pressure in the international financial markets. While it is a challenge to forecast exchange rates or even explain past exchange rate movements, the downward pressure on the dollar almost certainly arises from a combination of factors. Edwin M Truman, Senior Fellow, Institute for International Economics says, "The factors contributing to a fall in the dollar are: Growing recognition that the US external deficit is unsustainable and ultimately will have to be corrected with a large role played by exchange rates; questions about the US economy, in particular, fiscal policies; and dissatisfaction and concerns about US and international policies."

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