Dollar at Mid-2018

July 2, 2018

Unlike several past eras, the dollar is not currently experiencing a multiyear directional bias. Against other currencies monitored regularly on this web site, the U.S. currency rose in more instances than it fell during 2016. It depreciated in all instances last year but climbed, except against the yen, during the first half of 2018. To wit, the dollar in 2016, rose 3.2%, 7.0%, and 1.9% against the euro, yuan, Swiss franc and Australian dollar but declined by 2.9% against the loonie, 2.7% against the yen, and 1.6% relative to the kiwi. The only outsized move that year was a 19.5% leap against sterling, which got pummeled after the June referendum authorizing Britain’s exit from the EU.

In 2017, the dollar lost 12.3% against the euro, 8.7% against sterling, 7.6% relative to the Aussie dollar, 6.5% relative to the loonie, 6.3% vis-a-vis the yuan, 4.3% versus the Swiss franc, 3.6% against the yen and 2.0% vis-a-vis the kiwi. Then, during the first half of 2018, the greenback fell 1.7% against the yen but advanced 5.4% vis-a-vis the Australian dollar, 4.7% against the yuan, 4.5% relative to the Aussie dollar, 2.8% relative to the euro, 2.2% against sterling, 1.8% versus the yuan, and 1.6% against the Swiss franc.

Only against the yen, did the dollar move in the same direction in all three time frames, but none of those changes exceeded 4.0%. Only two of the aforementioned 24 bilateral dollar changes exceed 10% — the 19.5% appreciation against the sterling in 2016 and the 12.3% drop against the euro in 2017. These movements pale is size and significance to the dollars swoon from DEM 2.90 when floated in 1973 to DEM 1.70 in late 1978, or its doubling DEM 3.48 by February 1985 and slide back to DEM 1.576 late in 1987. Likewise, the yen swung from 308 per dollar in 1975 to 80 per dollar in 1995.

In times such as now when the dollar experiences a see-sawing pattern, big cumulative changes do not have a chance to accrue, and that dampens the influence of foreign exchange over¬† overall U.S. economic growth and inflation.¬† The same cannot be said viewed from the perspective of other economies, especially emerging markets where considerable portions of public and private debt are denominated in dollars. But where the dollar is concerned, international currency policy coordination requires the participation of the United States to be at all effective, and that’s not going to be forthcoming from the Trump Administration.

The dollar’s strengthening trend in the first half of 2018 does not appear to have run its course. The contrast in monetary policies of the Fed relative to the ECB or BOJ is continuing. In contrast to 2017, when the 10-year bund yield rose 22 basis points but the 10-year Treasury yield fell 4 bps, the first half of 2018 experienced a 46-bp increase in the the 10-year Treasury yield but a 12-bp settling back of the bund yield. While everyone loses a trade war, some players suffer more painful damages than others. As the lead protectionist and with less dependency on export demand than Europe or emerging markets, investors are counting on the United States at least in the short run to emerge more unscathed than others.

Copyright 2018, Larry Greenberg. All rights reserved. No secondary distribution without express permission.

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