Ten Years after the Onset of the Financial Crisis

August 7, 2017

The initial tremors of the financial crisis that triggered the Great Recession were felt ten years ago this week. The dollar is 56% and 17% stronger now than then against sterling and the euro but 18.6% and 7.6% weaker relative to the Swiss franc and yen. The dollar has also appreciated versus commodity-sensitive currencies such as the loonie (20%), Aussie dollar (9%) and kiwi (4%), which isn’t surprising in light of the weaker tone in commodity prices. West Texas Intermediate crude oil, for example, is 37% cheaper now than ten years ago.

The economic change that perhaps most embodies all of the last decade — both a severe recession and a multi-year subsequent expansionary business cycle — has been sustained very low wage and price inflation, which has depressed sovereign debt yields but bolstered share prices. Long-term interest rates have not declined by equal amounts. Ten-year U.S. Treasury yields are now 250 basis points lower than ten years ago. In a similar time comparison, ten-year British gilt and German bund yields have on net dropped by a greater 410 basis points and 390 basis points, while ten-year Japanese JGBs are just 167 basis points lower now than then. Looking just at concurrent changes in relative long-term interest rates, it makes intuitive sense that the dollar has appreciated against the pound and euro but declined relative to the yen.

The dollar is now also stronger than its ten-year moving averages of $1.5894 per pound and $1.2971 per euro. However, the greenback is  now also stronger than its 10-year mean versus the yen of 99.05.

Much has transpired during the past ten years to affect the dollar aside from the aforementioned business cycle swings that were not matched in the movements of inflation and long-term interest rates. Smart phones, which provided much of the impetus to social media and dysfunctional political leadership, also also hit the marketplace ten years ago. There’s been a rising tide of hate crime and drug-related deaths. It’s notable that nothing on the scale of the 9-11 attacks has recurred, yet terrorism persists and has been a defining force affecting attitudes regarding immigration, trade, globalization, and civil liberties. British voters chose to leave the European Union, and U.S. voters produced one of the profoundest shifts in its history by selecting Trump’s nationalism to follow Obama’s more traditional global orientation.

America has turned away from the role of the last 75 years as leader of the free world. This new orientation seems incompatible with long-term dollar reserve asset hegemony. The international monetary system may not change as drastically as when the dollar eclipsed sterling in that function after the second world war, but some change with implications for the U.S. currency seems bound to evolve.

Copyright 2017, Larry Greenberg. All rights reserved. No secondary distribution without express permission.


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