Inflation

• Inflation is the rate at which prices are increasing in an economy. When inflation is higher in the U.S. than it is in other countries, it will tend to cause the value of the dollar to fall in comparison to the value of other currencies. High inflation erodes the value of a currency. For example, if the U.S. experienced 7 percent inflation for 10 years, $1 would be worth roughly half what it was 10 years ago.
  
  

Increase in the Money Supply

• An increase in the money supply can lead to falling dollar values. If the U.S. government decides to print dollars to increase the money supply, dollars become easier to come by, so prices in the economy may increase. In other words, printing dollars can lead to inflation: the more plentiful an asset is, the less valuable it tends to be.
  
  

Demand for Dollars

• The value of any asset, including currency, is ultimately determined by the demand for the asset. If everyone wants to hold dollars, dollars will be valuable, while dollars will tend to fall in value if nobody wants to hold them. When consumer confidence in the U.S. economy is low, investors may divert money to assets that are not tied to the dollar. For example, an investor might buy gold, oil, stocks in foreign countries or foreign currencies if he thinks the U.S. economy and dollar will perform poorly. Falling demand for dollars and increasing demand for other world currencies can make the dollar fall in value.
  
  

Interest Rates

• Interest rate differences between countries can impact the value of currencies. When U.S. interest rates are low, demand for dollars may fall because it becomes relatively less attractive to save at American financial institutions. For example, if American banks offered 1 percent interest on savings deposits while banks in the U.K. offered 5 percent interest, foreign and American savers might decide to convert their dollars into pounds and save at banks in the U.K. rather than saving at banks in the U.S. Low demand for dollars would lead to lower dollar values.