so basically the world needs our dollars to be valued highly so that they won't go into a recession as well?A simple answer would be, In today's current situation, yes. Japan is just coming out of a long bout of deflation. To keep their exports cheap, they need to keep their Yen down, our dollar up. That is why they keep intervening and buying up our debt (Treasuries and bonds). China has their currency pegged to our dollar, so our dropping dollar doesn't necessarily help reduce the trade deficit, their currency is dropping right along with us and they are the largest part of our trade deficit balance. The Euro keeps gaining value against the dollar which makes their exports to here more expensive. They can buy dollar based goods, like oil, cheaply. But their exports are more expensive for us, China and Japan to buy.
I'm not sure where you are getting the gold/dollar info from. But there are two takes on this. If you believe in "The Powers That Be" then yes, the price of gold has been manipulated for years to be held down. But we are not a gold-based system anymore, simply fiat dollars. It's not so much that keeping gold down brought the dollar up. Keeping gold down is partially phsycological, reinforcing the idea of gold as a simple commodity rather than a currency for exchange. But that whole "Powers that be" or not would be a whole nother discussion. You are correct that the rise in gold is due to the drop in the dollar. 2 reasons, first it is the "flight to quality", a store of value. We saw it begin to rise with the threat of War in Iraq (actually 9/11 saw a bit of a rise as well). Uncertain times and now lowering confidence in the dollar. Second is simple inflation. Gold is a commodity used in jewelry and electronics. Our dollar is worth less (because there are so damn many of them now), so it takes more of them to buy an ounce of gold.
If foreign investors leave the US won't it be financially damaging to them as well, or is that just the spin our financial institutes put out to stop the average citizen from panicking about the economy?And that's the million dollar question. Yes it will hurt them somewhat, but who will it hurt more? If the dollar continues to decline to the point that Europes exports drop and their deficit grows to greatly (the EU has limits to how much of a deficit the member countries can run - that's why Germany is in a bit of hot water right now) something will have to give.
Hope this helps, think I got it right. I'm trying to find a good link on the whole inflation/deflation supply/demand/scarcity idea. I've got it somewhere. Meanwhile here's a paper from the EPI on the benefits of the dollars decline.
http://www.epinet.org/content.cfm/briefingpapers_bp140