5 Cents – United States

In 2004, the United States dollar was in a period of significant depreciation, continuing a trend that had begun in 2002. The dollar's trade-weighted index fell approximately 9% against a basket of major currencies for the year, with particularly sharp declines against the euro, which reached new record highs. This weakness was driven by a confluence of factors, most notably the growing U.S. current account and budget deficits, which raised concerns among international investors about long-term economic imbalances. The Federal Reserve, under Chairman Alan Greenspan, maintained a historically low federal funds rate of 1% until mid-year, which, while supporting domestic recovery, also reduced the yield attractiveness of dollar-denominated assets.

The economic context was one of robust recovery from the 2001 recession, fueled by tax cuts, increased defense spending, and a booming housing market. However, this growth was accompanied by what then-Fed Chairman Greenspan termed a "conundrum" – long-term interest rates remained surprisingly low even as the Fed began a gradual tightening cycle, raising the federal funds rate to 1.25% in June and to 2.25% by year's end. This environment of easy credit and a cheap dollar helped boost exports but also sowed the seeds for future instability in the housing and financial sectors. Policymakers largely viewed the dollar's decline as an orderly and necessary adjustment to reduce the massive trade deficit.

Internationally, the dollar's status as the world's primary reserve currency was unchallenged, but its decline prompted diversification murmurs among some central banks, particularly in Asia. Major U.S. trading partners, especially Japan and China, engaged heavily in currency intervention, buying dollars to prevent their own currencies from appreciating too rapidly, which would hurt their export-driven economies. This massive accumulation of dollar reserves by Asian central banks helped finance the U.S. current account deficit and placed the global economy in a state of fragile interdependence, later described as "Bretton Woods II." Thus, 2004 was a year where the dollar's weakness highlighted underlying global imbalances, even as it supported a strong domestic recovery.