Wednesday, December 2, 2015

How strong is the dollar?

This chart is arguably the best way to look at the relative strength or weakness of the dollar. It's calculated by the Fed, and adjusted for trade weights and inflation. There are two versions: one using a broad basket of currencies, and the other using just seven major currencies (euro, Can$, yen, pound, swiss franc, aussie$, and swedish krona). The most recent data, released today, shows that the dollar is trading about 2-12% above its long-term average values against these baskets of currencies. I've used a log scale for the y-axis in order to better reflect the degree to which the dollar is above or below its long-term average.


Benjamin Cole said...

I think the direction shows the Fed will have to reverse course pretty soon. US companies are losing market share, and reporting lower earnings. Tourism is hurt also.

Some say that so many currencies are pegged to the dollar, that when the Fed is too tight, the whole global economy suffocates.

It is interesting that mainland China recently depegged the yuan to the dollar. And now their economy appears to be recovering along with their stock market.

Another recession in the US would definitely result in deflation... And then what response from the Fed? Cut interest rates? They are already at zero.

The Fed is fighting the last war. But then when did any public agency ever do anything but fight the last war?

Lawyer in NJ said...

I think the course will probably be a 25 basis point rate increase and then waiting and waiting for the next one.

Fiscal policy must take over. Some want tax cuts, some want infrastructure spending. Compromise should not continue to be the road less travelled.

mmanagedaccounts said...

I favor tax cuts and would like to see the evidence for need of infrastructure spending. It is that every time the Dems talk about economic growth, they always point to the need for infrastructure spending. If there is the real need for highways, ports, rails, grids to increase commerce and productivity, I'd like to see it. I'm open but skeptical.

Scott Grannis said...

Infrastructure spending is something that should be done at the state/local level. I don't think this is a decision that can be made at the national level. Mandating massive spending at the national level is sure to create massive corruption and waste.