Currency Performance and Economic Growth: The Relationship is Not What You’d Think

May 10, 2011

Strong economic growth is often cited as a condition that will deliver currency strength.  At last month’s press conference, for example, that contention was part of Fed Chairman Bernanke’s answer given to a question about what the central bank is doing to secure a strong and stable dollar.  By promoting its dual mandate of jobs maximization and price stability, the Fed supports the Treasury’s goal for the dollar.

The premise of a positive correlation between how currencies move and relative rates of economic growth is not corroborated by history, however.  Real GDP over the ten years through and including 2010 averaged 1.7% per annum in the United States, 1.4% per annum in Britain, 1.1% per annum in the euro area and 0.7% per annum.  The euro is up 54.6% against the dollar and 8.8% against the yen since the end of 2000.  The yen shows an advance of 42.1% against the dollar, and sterling, which was ranked second to the United States among the four economies in speed of economic growth from 2001 to 2010, only climbed 9.6% against the dollar.  So the economy with the fastest long-term growth had the weakest currency, followed by the economy with the second best rate of growth.  Only in the stronger euro than yen does one find a positive correlation between currency and growth.

The ordinal ranking of projected economic growth in 2011-12 is the same as for 2001-10.  The United States with expected growth of 3.0% per annum again tops the list, followed by Britain at 1.8%, Euroland at 1.7%, and Japan at 1.3%.  These projection are based on the findings of The Economist’s May survey of forecasters published in this month’s issue.

Copyright Larry Greenberg 2011.  All rights reserved.  No secondary distribution without express permission.

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