Interesting discussion, especially for those of us north of the border.

I think much of the reason behind the decline in the USD is a natural rebalancing of US trade spending. The positive aspect of the lower dollar is improved competitiveness on the global market; the downside is the increased cost of imports, which is pushing up US inflation numbers. This isn't helped by the fact that oil is traded in USD. Although gas costs are up everywhere, here in Canada as well as in Europe, the increases have been much more moderate on a percentage basis than in the US.

The monster under the bed is the US subprime market. The reality is, there were (and are) millions of Americans in homes that they can't afford. The resulting glut has pushed down housing prices, which is pushing down consumer spending which was driving the economy. Not only do people feel poorer, but they aren't borrowing against the value of their home to finance spending habits. Deficit spending can only go on so long before the market will ultimately correct itself. This is one of the reasons why I question the benefit of the recent $150B spending bill. The deficit spending has simply been transferred from the consumer to the government.

Canada is in a much better situation given that there are only a low percentage of subprime home-owners and due to the fact that we are a resource rich economy. Furthermore, the strength of the CAD has kept inflation at a much more moderate level. That being said, the BOC dropped interest rates 50 BP this week to counteract a slowing economy and our manufacturing sector is being pummeled due to the strength of the currency.

I could be proven wrong, but I think that we may be seeing a shift from the USD to the Euro as a default currency. It only makes sense given the size of the Euro-zone economy and how badly foreign countries have been burned having foreign reserves dominated by USD. The downside of this is that reduced demand for the greenback will simply push it's value lower. How low it will go is anyones guess but the US economy is to large for the Euro to become the sole default currency. From an investment standpoint, it makes sense to have more than one default currency as it serves as a hedge. As China and India become increasingly industrialized, look for their currencies to gain traction as well.

What most people seem to forget is that the economy and it's derivatives are very cyclical. What goes around comes around. Although many might dispute this, I think the economic might of the US is in decline. Globalization has meant that the US economy is becoming more a cog in the wheel (albeit an important one) than the wheel itself, as can be attested to by great results out from a number of blue chip companies (ie Coke, HP) on the backs of their success in places like Asia in spite of the flagging US economy.