Thursday, April 4, 2013

Dollar update: still weak, but improving

The Fed's calculation of the inflation-adjusted value of the dollar against both major currencies and a very large basket of currencies shows the dollar has improved on the margin over the past two years, but it is still fairly close to its all-time lows. This is a reminder that optimism about the prospects for the U.S. economy, at least insofar as it is reflected in the world's desire to own dollars, is in relatively short supply. The outlook is not good, but at least it is improving on the margin (i.e., things are getting less bad).

One helpful development is the recent weakness in the yen, propelled today by the Bank of Japan's strenuous efforts to weaken the currency in order to reduce and perhaps eliminate the deflationary pressures that have plagued the economy for decades. As the chart above shows, the yen rose significantly (even awesomely) beginning in 1985. It reached a peak about a year ago, by which time its had more than tripled in value vis a vis the dollar (put another way, the dollar lost about 80% of its value vis a vis the yen).

As I've noted before, the yen's recent weakness has been a source of great cheer for the Japanese stock market. This is not the result of Japan engaging in "competitive devaluation." Rather, it is a case of Japan attempting to reverse the crippling, relentless revaluation of the yen that has made life miserable for the country's exporters for decades.

UPDATE: The Nikkei is up almost 4% in Friday trading, and the yen has fallen to 97. This is the hottest trade on the planet right now: long Nikkei/short yen.


Gloeschi said...

Nope, no currency war here, people. Nothing to see, move on.

Yen followed broadly the PPP, as shown in your chart. So why would the BoJ need to "correct" something? Germany lived quite well with its strong currency.

Benjamin Cole said...
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Benjamin Cole said...

do not know why the dollar rising is good news. I like it where it is, and would welcome further export-enhacing declines in the dollar exchange rate.

What nation in Europe has had its currency devalued, but has largely sidestepped the Euro-disease? Poland. they printed money, and have had almost no recession.

China has an aggressive, growth oriented central bank as well. And how has their economy performed? They complain when real growth is below 8 percent.

At long last, Japan's central bank is changing, and Japan may no longer suffer monetary asphyxiation in service of obtaining zero inflation.

Sadly, they spent themselves silly for the last 20 years in federal deficits.

Tight money just does not work. Forget ideology, forget theories, forget putative moral values. It just does not work.

Rob said...

Scott, the correlation between US Treasury yields and US stocks has once again gone crazily out of whack .. is it this time because of fears over korea war or Cyprus contagion or .. what ?

Once again it seems to have taken so many "experts" by surprise, as they were recently confidently predicting a move up in yields.

Sometimes it seems that US Treasury yields really may go to less than one percent, Japan stylee.

McKibbinUSA said...
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McKibbinUSA said...

Saving the dollar is a hopeless cause that the 99% crowd will never fund for the benefit of elites -- moreover, saving the dollar is unnecessary -- fixating on saving the dollar reflects an 18th century way of thinking -- those hoping to fix the dollar part the problem, and a nuisance to society at large -- more at:

Gloeschi said...

Scott, I already wrote your comment on the NFP data for you:
"Bad news is good news, because... erm Kudlow said so on TV.
It just shows how negative everybody is, so I must buy more Apple on margin.
It's also great because yields will go down further, just like in Japan, meaning people will HAVE to buy stocks, you know, because erm they can only go up, right?"

Benjamin Cole said...

BTW, The Economist index of commodities prices, in dollars, is down more than 11 percent in last year.

So the dollar is up against commodities, up against gold, up against the yen in last year---this is loose money?

And inflation expectations near or at record lows......

Brad Bradshaw said...

Value of the dollar is highly correlated with oil prices. With global demand for oil in retreat, oi prices are going to hit $80 per barrel before the end of the year, and the dollar is going to continue to strengthen. Once world economies start edging back up, the dollar will weaken, as commodities and oil prices go up and generate inflation. See my post on the matter: