The Dollar in Years When a New President Is Inaugurated
January 17, 2017
In February 1973, the second dollar devaluation in 14 months failed to stem heavy speculative downward pressure on the U.S. currency. Just a couple of weeks later, fixed exchange rates imposed by rigidly automatic central bank intervention were ended against the currencies of other advanced economies. A new system of floating exchange rates was born, first without any role for U.S. intervention. By July 1973, however, the need for some U.S. intervention at times of disorderly market conditions was reintroduced. Richard Nixon was president at the time. In 1971, he had severed the link between the dollar and gold, and the first presidential change of the floating rate era occurred when Nixon resigned in August 1974.
That was also the only presidential transition in the floating rate era not to follow the constitutional script of election on the first November Tuesday after a November Monday, followed by an inaugural pageant the following January 20th. In all, there have so far been only six new presidents sworn in via such a ceremony in the floating rate era. This Friday, Donald Trump will become the seventh to do so. The six precedents were Carter in 1977, Reagan in 1981, George H. W. Bush in 1989, Clinton in 1993, George W. Bush in 2001, and Obama in 2009.
Some other key countries have had a similar number of political leaders since 1973 as has the United States, while other have experienced considerably more of them. For instance there have been just five German chancellors, six French presidents, six supreme leaders of China. There have also been eight Russian leaders, nine British prime ministers and ten Canadian prime ministers. However, Japan and Italy have revolved through 23 and 27 prime ministers, respectively.
U.S. presidential transitions can trigger significant shifts in the dollar. Deterioration in U.S. inflation and the economy’s trade balance caused the dollar to fall 12.2% against the Deutsche mark between Carter’s inaugural in 1977 on January 20 and the end of that year and it depreciated roughly 20% additionally during the first ten months of 1978. Dollar weakness was also generated by loose verbal rhetoric from U.S. officials, and losses were not limited to the mark. By late October 1978, the yen was trading 75% above its fixed dollar parity level that had been abandoned in 1973.
Ronald Reagan inherited double digit U.S. inflation but also a reconfigured Fed policy that had shifted from targeting the interest rate to targeting money growth. The dollar’s lowest levels were hit a few quarters before the election of 1980, but confidence was still not high in the determination of the U.S. government and central bank to restore price stability at all costs. The Fed conducted matched sales on the day after the 1980 election. Short-term interest rates soared in 1981, and real interest rates embodied in longer-term rates were also lifted by Reagan’s program of tax cuts that widened the fiscal deficit. From the January 1981 inaugural to the end of 1981, the dollar advanced 12.3% on balance against the mark and 8.9% versus the yen in spite of a substantial but temporary downward correction in late summer. There would be two more big corrections within a multi-year period of recovery that saw the dollar ultimately double in value by early 1985.
In 1988, voters elected a new president but chose continuity rather than change, electing Reagan’s vice president to succeed him. The dollar had fallen considerably in 1985-87 but proved well-bid in the first several months of Bush’s presidency. That rally peaked in June 1989, however. And by the end of the first year, it was on balance 8.5% weaker than at the time of the inaugural. Unlike 1981, the dollar did not march to the same beat against all currencies in 1989. From the inaugural to yearend, it climbed 11.9%.
Bill Clinton’s first term as president began with some considerable bashing of Japanese trade practices, led by his first Secretary of the Treasury, Lloyd Bentsen. Not surprisingly, the dollar fell 10.5% between the inaugural in 1993 and the end of that year. But against the mark, the U.S. currency rose 8.2%.
The U.S. economy experienced a mild recession in much of 2001. Once that ended, the nation was coping with the shock of the 9/11 attack. 2001 was also early days in the European single currency experiment. The euro’s record low against the dollar had been set at $0.8228 in October of 2000, and it was perceived with suspicion in the early days of the Bush43 presidency. The dollar ended 2001 some 5% stronger than its inaugural day value against the euro. The U.S. currency performed even more strongly against the yen, rising 12.3% in the same span.
The sixth and last time that a new person was sworn in on January 20 occurred eight years ago and occurred under the most dire circumstances since Roosevelt replaced Hoover in 1933. Stocks were in free fall. Real GDP had plunged 8.2% in the final quarter of 2008, and the 3-month presidential transition period (November 2008 to January 2009) had seen non-farm payroll employment plummet by 2.255 million workers. From the inaugural to the end of 2009, the dollar fell 9.8% on balance against the euro but managed to rise 3.2% against the yen.
Two generalizations emerge from this history. First, dollar/yen and EUR/USD moved in opposite directions in three of the last five precedents. Secondly, changes in the White House’s occupant can be followed by significant dollar movement. Each of the six instances since 1976 saw a double-digit change in the yen or euro.
Copyright 2017, Larry Greenberg. All rights reserved. No secondary distribution without express permission.