Trade-Weighted Dollar on Fire

October 21, 2008

The trade-weighted dollar index that I monitor for analytical purposes is one calculated by the Fed against other major floating currencies.  It is the second one of three seen in the memo section of the hyper-linked table. The dollar at the end of today is 3.4% stronger than a week ago, 5.0% stronger than two weeks ago, 7.3% stronger than three weeks ago and up 10.6% from its value just four weeks ago on September 23rd. That’s a huge move in such a compressed space of time. By comparison, the average trade-weighted dollar value in full-2007 was 5.6% weaker than that in 2006, 7.0% softer than in 2005, and 8.8% weaker than in 2004.  One has to make a four-year comparison, a drop of16.3% between 2003 and 2007, to find a movement of the dollar that dwarfs what has happened over the past four weeks. The sharpest depreciation of the dollar from the standpoint of calendar year averages, occurred between 2002 and 2004, when the U.S. currency slid almost 20%. Dollar strength since September 23rd reflects de-leveraging and panicky asset liquidations.  Over this period, the DJIA fell about 18%, and the Nasdaq lost some 22%.  The Japanese Nikkei, German Dax, British Ftse and Canadian TSE dropped by roughly similar magnitudes of 23%, 22%, 19% and 18%.



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