Currently Strong Dollar Levels Against the Yen, Euro and Sterling in the Context of Historical Extremes

June 21, 2022

Dollar/Yen: A dollar high of 136.33 yen earlier constituted its most elevated level since September 1998 when Asia was embroiled in a debt crisis. During 2021, the dollar had strengthened against the yen from a low of 102.6 to 115.1 at the end of the year. The dollar’s historically weakest value against the yen, 75.55, was touched at the end of October 2011. Prior to the adoption of flexible exchange rates, dollar/yen during the 1960s had a parity of 360 yen per dollar, and in December 1971, the dollar was devalued to 308.  dollar/yen traded as high as 297.7 in December 1976 and as low as 79 in April 1995. Japan’s experience with in-and-out deflation (a downward trend in prices) over the past 30 years has been a major reason why central bankers erred for so long last year with maintaining an expansive monetary stance. It is infinitely easier for monetary policy to counter excessively high inflation than deflation once the latter is entrenched. Japan’s overnight central bank interest rate hasn’t been above 0.5% since September 1995.

Euro/Dollar: The euro’s history only goes back to the beginning of 1999 when a number of European currencies were merged into the euro, and political leaders endowed the European Central Bank with the responsibility of conducting a single monetary policy for the bloc. The euro at birth had a dollar value of around $1.675. During its existence, the euro has been as strong as $1.6038, which was touched in mid-July 2008 and as weak as $0.8228 in late-October of 2000. A euro low of $1.0359 last weak was the euro’s weakest dollar value since early January 2003. During 2021, the euro had been as strong as $1.2305 and had weakened to $1.1327 by the end of the year. The dollar has continued to appreciate against the common European currency this year as the Federal Reserve moved sooner than the ECB to reverse its monetary stance, whose overnight deposit rate of -0.50% remains at its historical low. The federal funds rate, by contrast, has been raised successively by 25, 50, and most recently 75 basis point points. ECB forward guidance has shifted lately in the direction of prioritizing inflation reduction, and the fate of EUR/Dollar over the second half of 2022 will be influenced by how the policies of the two central banks compare. Another factor that figures to be heavily influential on the euro will be the evolution of the war in Ukraine. Europe’s economy is bearing a larger burden than America’s from economic sanctions against Russia and the danger of being drawn in more directly by Putin’s aggression.

GBP/USD: Sterling had been as strong as $1.4250 last year and closed at 1$1.3525 on December 31st. Selling pressure intensified this year in spite of five consecutive 25-basis point hikes in the Bank of England base rate since December and  most recently done last Thursday to its current level of 1.25%. Last week’s low in the pound was $1.1937. Brexit hurt Britain’s standing in the world both economically and politically and left the country poorly positioned to deal with the twin shocks of the Covid pandemic and Russian invasion of Ukraine. The pound briefly touched $1.50 on June 23, 2016, the day of the referendum when voters answered no to the overly simple question, “Should the United Kingdom remain a member of the European Union or leave the European Union.” All the above levels were far weaker than the pound’s $2.80 value prior to its November 1967 devaluation, but sterling remains above its all-time low of $1.0345 touched more than 35 years ago in February 1985. Alternatively, in the early days of Thatcherism, the pound had strengthened to as high as $2.4565 in October 1980, it most expensive level since flexible dollar exchange rates began in March 1973.

Copyright 2022, Larry Greenberg. All rights reserved. No secondary distribution without express permission.

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