Dollar since the Bankruptcy of Lehman Bros.

September 9, 2018

The singular event in the transformation of the financial crisis of 2007 into the Great Recession occurred ten years ago this week when U.S. Treasury and Fed officials let Lehman Brothers fail rather than fashion an aid package as they had done previously that year for other institutions.

Compared to its closing levels on September 12, 2008, the dollar has on balance appreciated 38.8% against sterling, 23.1% against the euro, 24.0% versus the Canadian dollar, 15.9% relative to the Australian dollar, but just 5.3% vis-a-vis the kiwi and 2.8% against the Japanese yen. The dollar has on net also lost 14.3% versus the Swiss franc. The dollar price of gold has strengthened 55.9%, while that of WTI oil has plunged 33.0%.

Thanks in part to an earlier and more forceful macroeconomic policy response, the Great Recession was less pronounced in the United States than in many other industrialized economies, and the United States also emerged from the downturn sooner and more securely.

All this enabled the U.S. monetary policy cycle to move ahead of monetary policy cycle’s in other major economies, and that lead persists.  While the Fed and Bank of England have stopped purchasing assets, quantitative easing will not end until year end in Euroland and is continuing for the foreseeable future in Japan. The Fed funds rate target range has a ceiling now of 2.0%, matching its level at the time of the Lehman Brothers failure. By contrast, the Bank of England’s 0.75% policy interest rate now is 425 basis points lower than in early September of 2008, and the ECB deposit rate of minus 0.40% is a net 365 basis point lower. The Bank of Japan’s rate on policy balances is now -0.10% versus +0.50% then.

Net shifts in ten-year sovereign debt yields reflect the unsynchronized monetary policy cycles and have been a factor in the dollar’s appreciation. The U.S. Treasury yield is up 72 basis points on balance, while its counterparts in Germany and Japan are down by 379 bps and 144 bps. Those in Great Britain, Switzerland, Canada and Australia are respectively lower now than then by 314, 299, 132 and 320 basis points.

The U.S. stock market performance has also enjoyed an advantage during the past decade, as attested by a 249.5% net surge in the Nasdaq and a 126.9% advance in the Dow Jones Industrials. The German Dax and Japanese Nikkei compared to September 12, 2008 levels are 91.8% and 82.6% higher. Lagging even further behind are the British Ftse (34.4%) and Canadian TSE (+26.0%).

A ten-year interval gives currencies a long leash in which to fluctuate. The Aussie dollar and New Zealand dollar moved in high/low ranges against their U.S. counterpart that were 84% and 81% wide. Against the euro, the U.S. dollar ranged from $1.5144 to $1.0341, a bandwidth of 46.4%. Dollar/yen ranged even more widely, covering a breadth of 66.6% between 125.86 and 75.55. The dollar’s width of movement against the Swiss franc and sterling each also exceeded 60.0%, and so did the high/low spread of the euro against the yen these past ten years.

Copyright 2018, Larry Greenberg. All rights reserved. No secondary distribution without express permission.



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