ANSWER Investor psychology probably played a role in the decline of the dollar versus the euro in 2003-2006. Foreigners were pessimistic after the U.S. government announced that a weak dollar was acceptable since it helped firms trying to export. In addition, the U.S. government’s record budget deficit contributed to the demise of the dollar relative to the euro. Many foreigners believed the U.S. would have to finance its spending through an expansion in the money supply, which would lead to inflation, and cause a drop in the value of the dollar.