The US dollar devaluation is primarily caused by the lower interest rates set by the Federal Reserve. This was done to keep the American economy out of recession, to help liquidity challenged banks and to help overextended homeowners.
Our balance of payments (imports/exports), government borrowing, government spending, and a few other factors will affect the dollar's value over time, to a less significant degree.
A devalued dollar also helps our exports (meaning it helps firms like GE, Boeing, Caterpillar, Gm, etc) but may eventually make our imports more expensive, conceivably affecting consumers, or firms like Wal-Mart, BMW, Starbucks, etc.
Theoretically, the dollar will eventually balance and start to appreciate on its own; this could be acheived by the Fed raising interest rates, also.
This would also combat inflation, but would make capital (as debt) more expensive and could cause a recession. We don't really have significant, systemic inflation; raising interest rates to bolster the dollar might just cause a recession (meaning unemployment).
The "falling" dollar has been an economic trend for several years now; it is not necessarily harmful to US consumers, businesses, taxpayers, etc. If we get a lot of inflation as a result, the Fed will likely raise interest rates to fight inflation; this will strengthen the US dollar.
I should correct a few assertions mentioned in the above postings, also.
1) About half of our economy (as measured in GDP) is still based on manufacturing. The statement that we "have no manufacturing base" is completely false, by about 7.5 TRILLION dollars
2) There is some concern about the mortgage market, but it's hardly a mess. Fewer than 5?f all homeowners will be affected. Banks, hedge funds, and real estate specualtors will be hurt, more so than a few overextended homeowners.
3) More jobs have been created in the US by free trade than have been destroyed, by either trade liberalizion or by outsourcing. Every "outsourced" job equals 2 or 3 job created in the US. Our unemployment rate is currently less than 5?
In the 70's, in much of the 80's and through some of the 1990's our dollar was very strong against other countries currencies (and the Fed set our interest rates at very high levels).
This purged a lot of inflation, but DID destroy a lot of manufacturers, caused high unemployment, and resulted in decreasing levels of home ownership.
What we have now is the flip side of that.
4) Putting us back on the gold standard, besides being nearly impossible, would destroy our economy - high unemployment, recession, and possibly even Jimmy Cater style "stagflation" - ie, utter economic misery.
Investing in Gold as an asset class will get you returns that are less than historical inflation rates - ie, you will LOSE money investing in Gold. All asset class returns over a 20-30 year horizon beat gold handily - bonds, equities, energy, even real estate. (This data is readily available going back to 1920 - look it up on YahooFinance, and test it in a Microsoft Excel model.)
Gold has no intrinsic value - it's simply a rare, pretty metal. It's more useless than diamonds, and has no usefulness compared to oil, gas, coal, copper, etc.
So take your pick - a falling dollar, with high employment, easy credit, and a growing, booming economy; or, a "strong" dollar, with costly credit, high unemployment, and a contracting economy (recession).
Answered By: Andrew S - 11/19/2007