Friday, March 1, 2013

Dollar update: still very weak

Since mid-November, the dollar is up about 18% vs. the yen, down 2% against the euro, and up 5% against Sterling. But against a broad basket of currencies, the dollar is still very close to its all-time lows.

This chart shows the inflation-adjusted, trade-weighted value of the dollar relative to two baskets of currencies, as calculated by the Fed, as of the end of January. Take your pick: these are arguably the best measures of the dollar's effective value vis a vis other currencies.

Although there has been a lot of currency volatility of late, particularly in regards to the value of the yen, the dollar remains very weak from a long-term historical perspective. It is at least encouraging that on the margin, the dollar has been eking out some gains. By the Fed's broadest measure, the dollar's purchasing power relative to other countries is up about 4% from its 2011 low. My take on this is that conditions in the U.S. (e.g., fiscal and monetary policy, economic growth) haven't turned out to be as bad as the market had expected.

Once again, I think this is evidence not of increasing optimism, but declining pessimism. The dollar is still very weak, and that is a sign that there is lots of bad news still priced into the dollar.

From an investor's perspective, this argues against taking on significant exposure to non-dollar currencies, unless you are very bearish on the prospects for the U.S. economy. Foreign currencies on average are very expensive at today's levels.


Benjamin Cole said...

The Commerce Department released the PCE and PCE-Core measures of inflation for the month of January. Over the past 12 months ‘Headline’ measure clocked at 1.2% while the ‘Core’ measure was a split second faster, clocking in at 1.3%.

Not sure the dollar is "weak."

It may be setting into a new norm.

People used to sat "Japan has low interest rates." But what does "low" mean is they persist for 20 years?

The Fed obviously has to print a lot more money. Inflation is microscopic,and trending towards deflation. Japan.

The Fed;s $85 billion a month in QE is good, but maybe not hefty enough.

BTW, commodities prices are down from a year ago, by quite a bit. Almost 10 percent by some indices.

Rob said...

Dear Scott,
I live in UK and have just watched this:

Sure, it's a long-winded ad for a financial magazine here but it's main point - that the UK has unsustainable debt level that will become unsustainable as soon as interest rates rise, leading to Greek, Argentina or even Weimar Republic-style social breakdown ... it says UK debt is 900% of GDP, only beaten by Weimar Republic (this figure includes government sector pension commitments) ...

Anyway, what do you think and any advice for those of us living in this country ?

Many thanks.

Rich said...

The link below is apropos to USD weakness- not lately.- see-