Trade-Weighted Movements in the Dollar, Euro, Pound and Yen

December 26, 2012

Using period averages, I compared trade-weighted currency indices this month to December 2011, December 2007 and December 2002 to gauge how the dollar, euro, sterling and yen had changed value over the past year, past five years, and past ten years.

Net change in the U.S. dollar amounted to less than 1.0% since end-2011 and end-2007.   This highlights the lack of volatility in 2012 and an absence of sustained impact from the world financial crisis.  However, the dollar this month was 29.9% weaker than its December 2002 trade-weighted mean.  This depreciation is consistent with the long-term direction since fixed exchange rates were abandoned in 1973.  The United States has experienced significant current account deficits over most of this period.

The euro has been 3.2% weaker this month than in the final month of 2011 and 11.4% below its December 2007 level.  Compared to ten years ago, the euro shows a net trade-weighted advance of 5.3%, however.  Not only has the shared currency delivered lower and less volatile inflation to the region, it has been also associated with less currency volatility for most of the members vis-a-vis non-members.  Against one another, currency volatility, which at times had been tremendous prior to 1999, has been eliminated altogether.

2012 has been a decent year for the pound, which this month has averaged a 3.6% rise in trade-weighted value from a year ago.  On the other hand, sterling’s trade-weighted loss amounts to 16.0% compared to five years ago and 20.3% versus December 2002.  Sterling depreciated more sharply in the last five years than in the previous five-year period.  With a stimulative monetary policy, a chronic current account deficit of somewhat more than 3% of GDP and higher inflation (over 2.5%) than found in the euro area or United States, Britain’s currency lacks a strong fundamental foundationSterling’s long-term trend has been consistent with what one would expect. 

Based on a history of appreciation, the yen has extensive ground to reverse before the corrective movement would appear excessive.  Prime Minister Abe has charted an aggressive course to weaken the yen, attacking the problem with ultimatums to the central bank, a planned 10 trillion yen package of public works spending, and frequent verbal calls for a much weaker currency.  The yen touched a new 20-month low against the dollar and 16-month low today against the euro.  In trade-weighted, period-average terms, Japan’s currency this month has recorded a 6.6% drop since December 2011.  Nonetheless, it was 40.4% stronger on such a basis than in December 2007 and 28.7% above its level in December 2002.

Copyright 2012, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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