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The value of the U.S. dollar is garnering wider attention due to growing speculation about its future. During 2009, there was a growing concern over the decline in the value of the greenback relative to the Japanese yen and the euro. Questions were being raised about the role of the dollar as a global reserve currency. Even depression and hyperinflation were mentioned as possible offshoots of a cataclysmic dollar sell-off. Although the dollar has regained its footing so far in 2010, is there an underlying threat?

The broad measure of the value of the dollar is the Trade Weighted Exchange Index. At the end of November 2009, the dollar hit a 16-month low. The decline was based upon both a rebound in global economic activity and loose global liquidity conditions.

These conditions encouraged strong capital outflows from dollar-denominated assets like U.S. government securities to risk-based assets. A “carry trade” practice developed where dollars were borrowed to fund higher-yielding currency investments.

Although some see the dollar drifting lower, movements can quickly reverse course with the proverbial flight to quality. In fact, the dollar gained smartly against the euro through the end of February.

The fundamental reason behind the lower value of the dollar appears to be a problem of borrow and spend, and here lies the danger. The Congressional Budget Office projected the 2009 budget deficit at $1.4 trillion, with a $3.5 trillion 2010 deficit. The accumulated gross federal debt as a percentage of gross domestic product is estimated at 100 percent in 2011 by the Office of Management and Budget.

As U.S. deficits are increasingly being financed by foreign providers of capital, and as sovereign wealth funds and foreign central banks diversify away from dollar investments, the value of the dollar is subject to pressure.

However, a lower-valued dollar can provide a needed boost to U.S. exports and help narrow the trade deficit. With domestic consumption lower and the savings rate higher, robust foreign trade is critically important to a growing economy. Additionally, an improved level of consumer demand around the world is needed for better global balance.

The decline in the value of the dollar might be seen as an evolutionary move toward the dollar serving as the main form of liquid investments for countries rather than serving as an exclusive global reserve currency. Other currencies may soon emerge to fill global roles, such as the Chinese yuan. In any case, for the dollar to maintain on a long-term basis its central role on the world economic stage, a healthy U.S. economy with less public and private debt is needed. Also necessary is a reversal of the global imbalances. To that end, a weaker, more competitive dollar is a good tailwind.

Peter Percival is a registered investment adviser at Syverson Strege & Co. in West Des Moines.