Trade-Weighted Dollar Down About 6% from 2020 High

July 9, 2020

Ever since fixed dollar parities were abandoned in March 1973, analysts have used trade-weighted compilations of bilateral dollar values against other heavily traded currencies to gauge a gestalt of the dollar’s average performance. In one such index created by the Fed at the dawn of the floating dollar era, the dollar has ranged as high as 164.72 touched on February 26, 1985 and as low as 70.698 on March 16, 2008.

Three currencies (the euro, yen and sterling) account for five-sixths of that index, which is currently trading about 6.0% below its 2020 high in mid-March. The trade-weighted euro, by comparison, has appreciated roughly 5.5% in the same time frame. Compared to the floating dollar era peak in 1985, the dollar is now about 41% weaker, but it is also 37% above its 2008 low.

Getting an unexpected global pandemic initially lent the dollar safe-haven support, lifting the U.S. currency to first-quarter highs of 1.0637 per euro, 1.1414 per pound sterling, 0.5471 per kiwi, 0.5511 per Aussie dollar, YEN 112.2, 0.99 Swiss francs, and 1.4668 Canadian dollars.

However, the United States has badly misplayed handling the Covid-19 crisis, exposing systematic weaknesses in health care, other social safeguards, immigration, climate change policy, public education, criminal justice, race relations, and income and wealth distribution. America has been excluded from international alliances by both its own design and the necessity of other governments to reform alliances without America’s participation.  The Trump Administration’s weaponization of international finance has incentivized other countries to wean themselves away from dependence on the dollar and the U.S. economy.

Before the pandemic, the view was widespread that relations between the United States and the rest of the world might revert to pre-2017 norms if President Trump fails to win a second term, but this crisis has damaged that optimism. Whatever emerges from the November 3 election, it is clear that the cultural divisions in America run far deeper than one leader, who has turned every truth on its head. For the foreseeable future, the pandemic will dictate just about everything else that happens, and the epidemiology itself presents enormous uncertainty. Uncertainty will continue to be a dollar positive, but the world has seen enough of America’s response to the health crisis to be confident that a great deal of dismaying U.S. news lies ahead. And that humbling revision of America’s image spells trouble for the dollar in the long run.

Copyright 2020, Larry Greenberg. All rights reserved. No secondary distribution without expressed permission.

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