Countries are constantly exchanging goods, and to do so, they are using different currencies. But currencies are, like bonds or stocks, fluctuating elements (relative to demand and supply).
The dollar is the currency by excellence, the greatest part of world transactions are made with dollars (oil). Since the 1960's the dollar is considered as a strong and stable currency (help to attract investors) but since 2002, it starts to lose its value against other main currency like the euro or the yen.
Now, let us look a little bit closer to the relationships of central banks with the dollars. The major problem for the US government is the importance of the budget deficit. If it wants to lessen the deficit (and dampening the domestic demand) the dollar needs to fall by another 20% in trade-weighted terms in order to reduce the current account deficit. The reason of the actual depreciation comes from the strong government deficit which represents 4.6% of the GDP (from a surplus of 2.4% in 2000), and a huge trade deficit ($500billions). The lower exchange rate is already boosting exports and profits (exports rose at an annual rate of 19% in the fourth quarter 2003 and imports grew by 11%). The depreciation of the US currency can help the US economy to sell more of its good. But the FED is not yet preoccupied by the depreciation of the dollar, it stated that it would give positive shot on US goods.
The Asian central banks and more precisely Japan is massively acting on the dollars in order to stabilize its exchange rate with the yen. Japanese economy has started to grow again in 2003 by 2,4% (after more than 10 years of stagflation) but its interest rate have been cut to 0 and it can not use the discount rate policy to stimulate the economy anymore. So the Japanese central bank has been intervening in the foreign exchange market on a great scale, thus 175billions of dollars have been purchased in 2003 and the purchase reaches a record in January 2004 with 67billion (D^ and so P^).
