Dollar Performance During Different U.S. Presidencies

September 25, 2008

This is the fourth in a series of five examinations of comparative performances for key U.S. economic indicators during the nine presidencies since John Kennedy.  Equity prices were the focus on Monday, consumer prices were studied on Tuesday, and employment growth was dissected on Wednesday.

The euro did not exist in 1961.  The yen was a backwater currency.  Trade flows have changed so much in the last half-century as to render any trade-weighted dollar index a poor measure for this kind of study.  Another big transformation was the switch from fixed dollar rates to a flexible dollar regime after February 1973.  The best measure to use is the Deutschmark, which was the most representative gauge of dollar sentiment prior to 1999 and which segued nicely into the euro thereafter at 1.95583 marks for every euro.  EUR/USD continues to be the most important bilateral dollar pair.

Dollar stability is generally desired but not an expected outcome.  Allowing currency parities to move in response to market forces enables economies to absorb shocks and counteract cumulating disparities in fundamental economic trends between the United States and other industrial economies.  At times, one may want the dollar to fall, for instance if it is extremely overvalued and contributing to a widening and unsustainable trade and current account deficit.  Choosing between gradual appreciation or gradual depreciation over the long run, however, one would much rather see a strengthening dollar, as such reflects investor confidence in the U.S. economy and Fed policy.  Also, the dollar’s role as the world’s paramount reserve currency asset, which bestows many privileges, would be jeopardized if it sank every month.

My original August 19th article that compared five economic vital signs when the U.S. president was a Democrat to when the person was a Republican excluded Kennedy and Johnson from consideration because their presidencies occurred entirely during the fixed dollar era.  This article includes those administrations, since the Deutschmark revalued against the dollar in 1961.  This inclusion does not change the 3.6% per annum rate of dollar depreciation during those twenty years between 1961 and 2000 when the United States was governed by a Republican Administration.  But the 0.8% per annum average rate of appreciation for the twelve years covering the Carter and Clinton administrations gets bumped down to 0.3% per annum when the Kennedy and Johnson years are added to the mix.

I reported yesterday that the four Democrat administrations achieved the four fastest rates of job growth.  Democrats also owned three of the four best dollar performances.  The dollar rose 3.5% per annum against the mark during the eight Clinton years, was unchanged during the Johnson administration, and fell just 1.5% per annum when Kennedy was president.  The Republican administration with the best net dollar change was Reagan (down 1.0% per annum), followed by Ford (-2.9% p.a.), and Bush the elder (-3.5% p.a.).  The dollar got hammered during the first half of the Carter administration and fell 4.4% per annum over the whole four years of that presidency despite closing 18% higher than the trough.  The dollar has depreciated 5.7% per annum against the euro so far during the second Bush administration, ranking eighth out of the last nine presidencies on this criterion.  Only a drop of 7.6% per annum during the time when Nixon was president was more steep.  That period included formal devaluations in December 1971 and February 1973 and the eventual abandonment of a fixed dollar international monetary system in March 1973.

One final observation — the dollar rose on balance in only one of the last nine presidencies.  Regardless of which party is in power,  a clear pattern of depreciation is firmly established for the last half-century.  One of the great paradoxes of the dollar’s leadership in reserve asset portfolios is its failure on one of the major desired qualities of a reserve currency, which is being a reliable store of value.  In light of the dollar’s past performance and in spite of two multiyear periods of considerable appreciation, the burden of proof when making a long-term dollar forecast belong to those who think it will appreciate.  That looks especially true for now in light of this past month’s upheaval in the banking system.


One Response to “Dollar Performance During Different U.S. Presidencies”