The Seven Really Big Dollar Swings

September 10, 2008

The bilateral dollar relationship that best epitomizes U.S. currency sentiment was tracked by the Deutsche mark until 1998 and the euro since 1999.  Since the late 1960’s, there have been only seven really big swings in this relationship.  The dollar came under intensifying selling pressure in the latter stages of of the fixed dollar rate era, resulting in devaluations in December 1971 and February 1973 followed by continuing depreciation through the balance of the 1970’s.  The dollar/mark averaged 3.99 in 1968, fell to 3.223 in December 1971, and a low of 1.70 on Nov 1, 1978, a level revisited at the start of 1980.  That whole period in which the mark rose 135% in total and 90% from December 1971 constituted the first and longest dollar phase.  The second big swing saw the dollar rise 105% to DEM 3.48 in the five+ years to February 1985.  Swing number three involved a mark rise of 121% to 1.576 per dollar at end-1987 and took almost three years to complete.  The fourth swing was the smallest in duration (18 months to June 1989) and magnitude (29% to DEM 2.0405).  The fifth move involved a weakening dollar lasting almost six years and a D-mark advance of 52% to 1.345/$ in March 1995.  The sixth move entailed the dollar’s second golden era and went on for 5-1/2 years in which the dollar on balance climbed 77% to 2.377, which is the DEM-translation value of the euro’s October 2000 all-time low of $0.8228.  The seventh and final phase extended almost eight years and saw the euro advance 95% to $1.6038 last month, if in fact that peak was the last hurrah.

All seven really big movements contained counter-trend corrections, some of which were quite forceful.  Here are a few examples: a short-lived 30% dollar spike in 2H73, another 18% dollar rise in the six months to September 1975, rises in the mark of 18% in the 3 months to 11/81 and of 12% each in the 3 months to January 1983 and the two months to March 1984, and a 27% post-Gulf war dollar leap in 1991.

It is possible that the seventh really big dollar shift did not terminate last month and that the $1.6038 euro high will be surpassed before the dollar recovers enough ground over a sufficiently long period of time to constitute an eighth major movement.  A 14% dollar advance thus far over eight weeks doesn’t measure up to the parameters of the seven previous mega-swings.  Some analysts are convinced that a big multiyear dollar recovery is indeed now underway, based in part on the long previous eight-year span of dollar weakness, which was interrupted only once in 2005 by a 17+% countertrend recovery of the dollar.  This view is also supported by indications that a euro at $1.6038 had become severely overvalued.  I’ve expressed my own doubts already on this site about this contention.  I have four reservations against the opinion that the dollar has embarked on a huge four to six-year uptrend.  First, cyclical forces favoring the dollar will not endure long enough.  Second, fundamental imbalances in the U.S. economy, which were responsible for the dollar’s weakness earlier this decade, remain substantial.  My third source of skepticism is a “seeing is believing” argument.  The really major reversals do not happen often.  One need look no further than the fact that the dollar is far weaker now than forty years ago to conclude that the burden of proof in any long-term dollar forecast rests with dollar bulls, not dollar bears.  Fourth and last, a new U.S. administration will take power in Washington in January, and rookie mistakes in currency management are bound to happen during 2009.

David Gilmore of Foreign Exchange Analytics presents an entirely different reason for not endorsing the view that the dollar will climb sharply further from current levels.  He writes that cyclical forces are vastly over-rated as the cause of the dollar’s rally and asserts that the appreciation has been  “nothing more than a massive deleveraging and risk aversion trade.”

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