Diversifying Into Other Currencies

The following is a transcript of "Money Girl's Quick and Dirty Tips for a Richer Life," a podcast from QuickAndDirtyTips.com. The audio program is available via RSS feed here and at TheStreet.com's podcast home page.

Hello and welcome to Money Girl's Quick and Dirty Tips for a Richer Life.

Today's topic: Diversifying into other currencies.

A listener named Dave emailed me with this question:

How is the U.S. dollar valued on the international market? Why does the value fluctuate? And more importantly, why is the U.S. dollar now in a free fall?

I'm a U.S. citizen living in New Zealand. I often transfer funds from the States to New Zealand. With the value of the dollar falling (which is correlated to the New Zealand dollar's rise), I experience a monetary disadvantage with each transfer.

Thanks for the questions, Dave.

The Declining Dollar

The U.S. dollar is falling and it's especially noticeable to U.S. citizens traveling or living outside of the United States. Measured against a trade-weighted basket of other currencies, the dollar has lost a quarter of its value since 2002 and 6% since August.

When the dollar falls relative to other currencies, the prices of imports in the U.S. go up, and the prices of U.S. exports go down, creating more demand for U.S. goods that are sold overseas. A weak U.S. dollar means that your money doesn't buy you as much when you're traveling or living abroad and converting U.S. dollars to other currencies.

A friend of mine from Ohio who's living in Oxford, England recently emailed me to say how much more she would be enjoying life there if things weren't so much more expensive than what she's used to. A weak U.S. dollar can mean paying $5 for a coffee in Paris or $100 for a dinner for two in Auckland. Ouch!

For the most part, currencies aren't fixed, but fluctuate or float relative to one another. This has been the case since 1971 when President Nixon ended the gold standard for the dollar. From 1944 to 1971, the Bretton Woods agreement was in effect, which fixed the U.S. dollar to gold and other nations' currencies to the dollar.