The dollar’s exchange rate against the yen, which was fluctuating within the 108-112 yen range until early October, has begun to move downward in recent weeks despite such negative factors as the devastating typhoons and earthquakes that ravaged Japan.

Since the dollar is declining vis-a-vis the euro as well, the yen’s recent movements reflect the weakness of the dollar rather than the strength of the yen. Of course, there were also political considerations, such as the U.S. presidential election, but let me focus here on the economic factors that have pushed down the currency of the United States.

First comes the expansion and accumulation of the current account deficit. Figures released Oct. 14 by the U.S. government show that the U.S. trade deficit grew faster in August than it has in recent trends. The deficit is forecast to get even bigger since crude oil prices remain high.

The second factor is the changing trend of capital inflows into the U.S., which are continuing to finance the current account deficit.

During the information-technology boom of the 1990s, roughly half of it was made up of direct investment. But capital inflows have been in negative territory since last year. From a securities investment standpoint, less overseas money is being spent on U.S. stocks and corporate bonds, and more on Treasuries. This has dampened the sentiment of the stock market, and the Dow Jones Industrial Average has often dipped below the 10,000 mark. Needless to say, investors are worried about the future of the U.S. economy.

The third factor is U.S. interest rates. Until just recently, it was widely forecast that the Federal Reserve Board would raise its guiding rate at least two times more, but now it is believed that the FRB will keep interest rates unchanged, given U.S. economic fundamentals and stock market trends. This makes it less attractive to invest in Treasury bonds, which account for a major portion of U.S. capital inflow, and could trigger further dollar-selling.

Here, we need to keep in mind that China and other Asian countries account for a greater portion of the Treasury bonds being managed by foreign governments. Since those countries are having difficulty coping with high oil prices, there’s a growing likelihood they may withdraw funds from their Treasury investments.

The fourth factor is that the troubling situation in Iraq will put greater pressure on widening the budget deficit, which is closely linked to the current account deficit.

To deal with these twin deficits, the administration of re-elected U.S. President George W. Bush is expected to cut back on expenditures and review tax cuts. Possible interest rate cuts to ease the negative impact of lower spending may in turn trigger dollar-selling.

The fifth element to consider is U.S. demands on China to revaluate the yuan — or at least to widen its margin of fluctuation if it remains pegged to the dollar.

Washington believes changes in the dollar-yuan exchange rate will reduce the U.S. trade deficit with China, but such an argument is a double-edged sword. The more the U.S. pressures China to revalue the yuan, the more that market participants will be convinced the U.S. must weaken the dollar to cut its trade deficits. If the deficits don’t shrink, the market will think the dollar needs to drop further.

Finally, the euro is gradually taking over the function of the dollar as a key currency, attracting funds from around the world. The growing risk of terrorism and other problems facing the global economy calls for diversification of capital management, and this is reflected in the rising price of gold. It has already been reported that China and some Arab countries are shifting part of their dollar-denominated assets elsewhere.

Former FRB Chairman Paul Volcker, who has witnessed the historic events that affected the world’s currency regimes, such as the suspension of the dollar’s gold convertibility, the Smithsonian Conference, the transition to a float system, and the Plaza Accord, has forecast that the dollar will go through a major adjustment phase sometime within the next five years, though he doesn’t exactly know when.

With his rich expertise, Mr. Volcker apparently knows that the problems mentioned above are hard to overcome, and that they will eventually come to the fore in currency exchange rates.

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