Where this Year of the Dollar Stacks Up against Others

March 10, 2015

With 81% of this year still waiting to be played out, 2015 is already shaping up to be a special year for the dollar.  Today’s high of $1.0697 per euro was the strongest level against the common European currency since April 9, 2003, and at a peak earlier today of JPY 122.04, the U.S. currency had surpassed all levels against the yen since July 23, 2007. 

To be sure, currency market history has a few calendar year examples of very dramatic dramatic directional reversals.  In 1973, the year that floating market-determined dollar exchange rates were adopted in March, the dollar had weakened about 25% by early July against the mark but recouped that whole loss by late December.  In 1980, the dollar rose slightly more than 10% by early April but suffered a 15% net decline between the start and end of the year.  And in 1985, the dollar had appreciated around 10% against the mark and almost 5% versus the yen by late February but plunged 29% and 24% against those monies over the remainder of the year.  Those turnarounds were special cases, backed by fundamental economic shifts and policy changes. 

There are several reasons why a dollar decline between now and the end of 2015 seems unlikely.  U.S. monetary policy is not synchronized with the policies of the European Central Bank, the Bank of Japan, and numerous emerging economies.  Opinions differ over when the first federal funds hike will be engineered and the exact ensuing path of rate normalization, but the chances that the next policy move by the Fed will be one of greater stimulus is considered slim.  Unlike elsewhere, U.S. inflation is in a Goldilocks situation, below target but not so much so as to be in grave danger of evolving into a deflationary state.  The U.S. enjoys a clear advantage in economic growth and even in 2016 is perceived likely to be almost twice as fast as growth in either Japan or the eurozone.  The U.S. current account deficit is likely to hover near 2.5% of GDP, which though not ideal is within quite manageable boundaries.

On Bloomberg radio today, the renown economist, Gary Shilling, characterized 2015 as a year of the dollar.  In fact, the dollar already is well on the way to deserving such a distinction.  At today’s highs, it had climbed 13.1% against the euro but just 2.0% against the yen since the end of 2014.  By last Friday, March 6, A Federal Reserve-compiled weighted average of the foreign exchange value of the U.S. dollar against a subset of the broad index of currencies that circulate widely outside the country of issue (TWI) was showing a 7.6% year-to-then advance.  To wit, in this 43rd year of the floating dollar era, 2015 arguably would rank as the seventh strongest year of the dollar provided the U.S. currency doesn’t do any worse over the rest of 2015 than hold onto current levels.  Considerable scope actually seems to exist for extending its gains certainly relative to the yen.

Calendar years in which the dollar performed clearly better than this year’s gains thus far are listed in descending order below.

Dollar versus TWI Euro or D-mark Japanese yen
1997 +12.0% +16.7% +12.5%
2014 +11.4% +13.7% +13.6%
2005 +8.3% +14.8% +14.9%
2000 +8.0% +7.1% +12.1%
1981 n.a. +14.9% +8.3%
1984 n.a. +15.6% +7.5%


Five other banner years for the dollar that deserve honorable mention were 2001, 1996, 2013, 1992, and 1999.

Dollar versus Trade-Wted Index Euro or D-mark Yen
2001 +6.3% +5.8% +14.8%
1996 +4.8% +7.2% +12.3%
2013 +4.1% -4.1% +21.4%
1992 +10.3% +6.2% -0.1%
1999 +8.0% +16.1% -10.0%

2015 is not a one-year wonder.  If 2015 joins the above top vintage years of dollar performance, it will be part of the only three-peat on the above listings.  As the second strongest end-year to end-year performance, 2014 already has earned “year of the dollar” honors, and 2013 also made the top ten. 

The meaning of the dollar’s multi-year span of strength requires some understanding of its performance since the middle of the last century.  The U.S. economy came out of the Second World War with enormous advantages relative to lands in Europe and and Asia that had suffered devastating destruction of physical and political infrastructure.  From an artificially inflated pinnacle at the start of post-WW2 currency market history, it is not entirely unexpected that much of the time saw the dollar’s external value give back ground.  A fixed exchange rate regime designed at the Bretton Wood conference in 1944 proved unsustainable.  From the mid-1960s, U.S. inflation, current account, and often growth underperformed trends in other key countries.  The dollar was severed from gold convertibility in mid-August 1971, devalued in the ensuing December and devalued a second time in February 1973 before floating 42 years ago this month.  One finds only two prior periods of multi-year appreciation, the early 1980s and the the late 1990s.  In each of those golden ages, U.S. government officials explicitly promoted dollar appreciation.

It can be said that a third golden age for the dollar is well underway.  The case for such distinction will be pretty airtight if the U.S. currency extends its 2015-to-date gains.  With most of the year still remaining, 2015 could even replace 1997 as the best dollar year since the 1960s, and that would give the present era of prolonged appreciation two of the best three years in the bunch, not to mention the only sequence of three top years in a row

A fundamental rule of flexible exchange rates is that upward and downward runs surpass requirements for market equilibrium.  In layman’s terms, they overshoot, and that causes a build-up of economic imbalances that become a basis for an eventual swing of currencies in the other direction — often with policy prodding.  Federal Reserve officials will welcome a rising dollar up to a point.  Monetary conditions can tighten either through a rise in real interest rates, reduced growth in the stock of money, or an appreciating dollar.  The faster and farther the dollar rises, the less nominal interest rates need to rise to generate any desired normalization of monetary conditions.  However, in light of the abnormally low level interest rates, officials will not be pleased to see an over-reliance on a rising dollar to accomplish their objective.  More importantly, substantial dollar appreciation would cause unbalanced U.S. economic growth and a widening of the current account deficit.  Huge deficits were the undoing of dollar appreciation by the mid-1980s and again in the early noughties.

But markets do not appear to be at such a point yet.  The story of 2015 is likely to be that it will take its place high on the leader board of winning years for the dollar.

Copyright 2015, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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