It Was Twenty-Nine Years Ago Today

February 26, 2014

The U.S. currency recorded its strongest level of the floating dollar rate era on February 26, 1985 after a highly speculative run-up in the first two months of the year.  That day marked the last hurrah of early 80s upswing.  From a low of DEM 1.7000 at the start of 1980, for instance, the dollar had more than doubled in value to 3.478 Deutche marks.  Dollar appreciation had been a result of falling U.S. inflation, very high real interest rates caused by a mix of tight monetary policy and loose fiscal policy, an erosion of union political and economic power in America, all sorts of deregulation including in financial services, and a Reagan Presidency that inspired a greater sense of national self-importance and actively sought a stronger dollar, which was interpreted as the market’s vote of confidence in Reaganomics.

Aside from DEM 3.478, other dollar highs posted on February 26, 1985 were 2.937 Swiss francs, 263.8 Japanese yen, 1.034 dollars per pound sterling, 10.63 French francs, 2,177 Italian lire per dollar, 191.8 Spanish pesetas, 1.4316 Aussie dollars, and 1.406 Canadian dollars.  An ounce of gold cost $285, and the Federal Reserves trade-weighted dollar index against other major currencies was at 148.12.  Compared to those levels, the present value of the dollar shows losses of 78.8% against gold, 69.6% versus the Swiss franc, 61.3% vis-a-vis the yen, 58.9% relative to the euro translation value (ETV) of the mark, 54.9% against the ETV of the French franc, 36.6% against the ETV of the Spanish peseta, 35.0% versus the ETV of the Italian lira, 22.1% against the Aussie dollar and 21.0% relative to the Canadian dollar. 

Over the past 29 years, the trade-weighted dollar fell by 47.9% or 2.2% per year.  While 148.12 marked the trade-weighted dollar’s peak in the U.S. currency’s first golden age, the peak after the second golden age, which filled the latter 1990s but spilt over into the early noughties was 113.1 hit on January 28, 2002. I call those periods golden dollar ages because uptrends in the U.S. currency endured for multiple years in each instance, albeit with some temporary technical corrections that interrupted the appreciating trend.  While the dollar has recorded strengthening movement at other times during the floating exchange rate era, such shifts occupied fragments of a year, rather than stretching over several of them.  At peak, the second golden age of the dollar left its trade-weighted value still 23.6% below the February 1985 peak. 

The main lesson to take away from this long-term dollar performance is the disassociation of the dollar’s performance against gold and other paper currencies from its thus far unchallenged role as the world’s predominant reserve currency. 

Copyright 2014, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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