Dollar Movement Has Become Unremarkable

May 7, 2019

After a system of fixed dollar parities against other major currencies was replaced by market-determined flexible exchange rates in March 1973, currency trading attracted considerable investor and business attention amid a propensity toward wide and erratic dollar swings that could overwhelm the profitability of business decisions based on other considerations. The dollar not only exhibited bouts of extreme short-term volatility but also instances of cumulative directional movement. In one example of dollar strength, the U.S. currency posted end-year to end-year gains against the Deutsche mark of 14.9% in 1981, 5.7% in 1982, 14.5% in 1983, and 15.6% in 1984. Alternatively, two instances of dollar weakness were a 20% slide against the yen from end-1994 to April 19, 1995 and a 50% debasement against the mark in the three years between the end of 1984 and end-1987. Being affected by a myriad of factors — economic news, technical imbalances in the market, real and projected policy changes, political developments, etc — foreign exchange provided excitement to investors looking for a challenge and to market watchers trying to make a living by making sense of it all.

When this web site launched 11 years ago and for many years thereafter, a standard feature was a weekly dollar essay included in the “insights” section meant to provide fresh perspective on the dollar’s behavior and outlook. One could always count on more than sufficient fresh material each week to support that standard feature.

Lately, however, dollar movement has been frankly unremarkable and pretty much divorced from whatever else is happening. Over the course of 2018, the dollar managed to rise 4.9% against the euro and 0.9% versus both the Swiss franc and sterling while slipping 2.7% relative to the yen. And with slightly more than a third of 2019 now in the book, there’s been dollar appreciation of 2.3% against the euro, 3.9% versus the franc, and 0.8% against the yen, offset by a drop of 2.4% vis-a-vis sterling. That’s not enough for a weekly or even bi-weekly feature. Dollar news is best handled on a daily basis in the overnight summary of developments and by an occasional piece taking a broader look at key themes.

The U.S. and most other government’s no longer engage in tactical forex transactions to counter disorderly market conditions¬† or strategic currency sales or purchases to rectify currency relationships that seem misaligned with prevailing economic fundamentals or hindrances to major macroeconomic priorities. The U.S. is still running a chronic current account deficit as it has for most of the past 45 years, but it is manageable in size at about 2.5% of GDP especially given other U.S. fundamentals that are attract plenty of foreign capital such as comparatively high economic growth, revived productivity growth, favorable interest rate differentials, and historically low unemployment. An erosion of the rule of law in America hasn’t been a headwind deterring incoming capital.

The influence of inflation as a driving determinant of currency values has seemingly waned. The connection between inflation and forex movement is conceptually obvious. Deflation or inflation measures the internal rise or fall in the value of money, and currency appreciation or depreciation does the same for the external value of dollars vis-a-vis the money of other countries. But increasingly, inflation tends to march to an international rather than domestic beat. Inflation rates in the major countries show more convergence and are doing so at generally low levels. In March 1980, when U.S. CPI inflation crested at 14.6%, that pace was still much less than 21.3% in Italy or 19.8% in Great Britain but well above 8.0% in Japan or 5.4% in Germany. Not only do widely different rates of inflation create sharp currency movement signals, but so too do the subsequent disinflationary stages of the price cycles. But the world has now moved past both of these stages, and inflation for the most part is no longer is a characteristic that differentiates one currency strongly from another.

For me, the bigger surprise than the dollar’s muted reaction to economic trends is its modest response to domestic political and global geopolitical developments. The revolution of U.S. foreign policy hasn’t mattered. Authoritarian regimes are admired and treated warmly by President Trump, while treaties with traditional allies are gleefully discarded. The currency market reaction: not our problem. The planet faces an existential threat from climate change, and governments are paralyzed to act in unison to limit the danger. Again, foreign exchange markets see no problem. The constitutional crisis of the century looms between the executive and legislative branches of the U.S. government yet has produced no more than a yawn from foreign exchange. Politics in Great Britain has run truly off the rails from the standpoint of addressing social problems of the day, yet sterling has strengthened this year against the euro, dollar, yen and Swiss franc.

In an ideal world, one would hope that when political mechanisms fail to make decisions that prevent the destruction of the human race, economic forces would provide that function. That so far does not seem to be happening at least from the arena of foreign exchange.

Copyright 2019, Larry Greenberg. All rights reserved. No secondary distribution without express permission.

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