Thursday, October 16, 2008

US Dollar (v. Major Currencies) Hits 18-Month High

Update: Major currencies index includes the Euro Area, Canada, Japan, United Kingdom, Switzerland, Australia, and Sweden (details here).


At 10/16/2008 6:08 PM, Anonymous Anonymous said...

Again, just like with inflation, Mark takes a seemingly good indicator and doesn't understand that it is actually a bad indicator.

The rising dollar simply indicates that people would rather hold liquid cash rather than assets like equities or real estate. If anything this proves that people have more trust in the government than in the private enterprise system.

A sad state of affairs.

At 10/16/2008 6:26 PM, Anonymous Anonymous said...

The value of the US$ will continue to weaken over time due to our inability to balance consumption and production. The value of the US$ will accerate to the downside sooner rather than later.

History does not offer favorable lessons of net debtor nations.

At 10/16/2008 6:47 PM, Blogger the buggy professor said...

1) Thank you, Mark, for your continued efforts to trace the revival of the $US value in exchange rate markets against major currencies.

When you get a chance, please, could you indicate what year is the base 100 for? And, if possible --- if you have the time and inclination --- could you kindly indicate the basket of currencies and whether the yearly trend is trade-weighted? (I suspect it is, but can't infer this unambiguously from your table).


2) A brief political explanation of the dollar's recovery, especially against the Euro, might be useful here.

Wait though. Keep in mind that this political explanation is only one of four or five other influences shaping the $US's value in currency markets . . . the others economic, such as the underlying strengths of the:

* US economy in productivity, future growth prospects (predictions of the speed of real economic recovery), technological vigor, the great range of financial investments here, and --- more to the point in the current financial crisis ---

* The far greater vulnerabilities of European banks compared to US banks, whether measured as short-term liabilities as a percentage of national debt, of GDP, or the leverage ratios (assets vs. equity).


3) Enter the two-sided political influences:

* The US government is capable of quick unified action at the Federal level in its ability to reach financial decisions about bank-rescues, Federal Bank monetary policies, tax policies, and what have you . . . at any rate, in a crisis like the current one.

--- By contrast,the EU has 27 members, and even the Eurozone 15 (a 16th, tiny Slovakia --- the four new East European member since the EU's expansion a few years ago). They have very different views, do not have centralized regional EU government even of a federal and divided executive-legislative branch like ours, and have to balance big and small countries' different views and voting rights. Even the EU Central Bank has to deal with the members chosen by the eurozone member states.


* In moments of high uncertainty or economic or security-driven fears, the US remains the linchpin of the global economy in political and military terms. Investors and governments world-wide know this, whether they like it or not.


4) Hence? In all likelihood, the dollar's weighted value against other major currencies will, for good or bad, continue to rise in the current financial crisis.

But remember here: a rising dollar is a mixed bag for American exports and imports of goods and services (which balance investment inflows and outflows, short- and long-term in our overall balance of payments).


5) On a different but related plane, with virtually all of Europe in recession, and with the US economy sliding into it clearly now, hopes to keep the global real economy growing are pinned on the giant economies of Japan, South Korea, China, and India.

The trouble is, three of these four countries --- India the exception --- are powerfully oriented toward export-led growth as the driving force of GDP expansion. And with the European and US, Canadian, and Australian economies slowing down, both household consumption and business investment are falling off. That has reduced powerfully the export opportunities of these three large Asian economies.


India, though less export-dependent by far than the other three countries, has been slowing down for a year now for domestic reasons, and it is likely to continue slowing.


5) Enter the problems for them and us.

None of these four Asia countries --- not even the rich Japanese and South Koreans --- are accustomed to reorienting economic growth to domestic consumption.

A graphic in the NY Times for today (Oct. 16, 2008) shows just how low personal consumption is in

India..$0.6 trillion


6) Note quickly.

* Part of the low-consumption is explained by much lower per capita income in India and China --- though, as a counter-balancing affair, their combined population (2.5 billion or so) is 8 times larger than the US's and about 5 times that of the EU-27.

* On the other hand, government efforts to keep consumption low, investment high (and hence savings very high), and imports restricted one way or another while exporting the excess savings abroad to sustain a trade-surplus on current account goods and services . . . all these count a great deal too in explaining China's, Korea's, and Japan's relatively low consumption levels.


Consider Japan.

A rich country with a per capita income adjusted for purchasing power parity with the dollar --- 127 million people, each enjoying about $33,500 (somewhat higher than the EU-12 West European average) --- it has been opening up more to personal consumption since the early 1990s, but still reaches only about 55% of GBP, compared to the US level of around 70%.

China's personal consumption is an astonishingly low 40% --- this, even though it has been on the rise for three years now.

And India's personal consumption is more like the EU's and the US's --- around 63% --- but it's per capita income in PPP terms is a low $2600. China's by contrast is about $5500.


7) So where are we? With several conclusions:

(i.) We want Asia to continue to grow --- hope, too, that it can do so by means of shifting to more domestic-led growth, especially in Japan, China, and South Korea (not analyzed here: population under 50 million). If it does, then the $US will --- despite rising relative to the Yuan (not the Yen interestingly) --- be able to enjoy continued export-vigor . . . even if at a lower level than last spring.

(ii.) Such a reorientation toward domestic-led growth in China and Japan and South Korea would, moreover, have one more virtue. More imports from us would be possible, and less exports from them into the US market would likely follow too . . . mainly by adjustments through the exchange-rate mechanism of the dollar vs. the Yen, the Yuan, and Korean Won.

(iii.) The causal influence here? Lower levels of exported excess-savings above the levels of domestic investment would be the primarly driving cause. That would translate into a lower dollar compared to these three currencies, and hence lower levels of imports and higher levels of our exports back to them.


(iv.) On our side, --- hopefully as we rise out of the current recession --- we would have to shift some of our high levels of domestic consumption into savings as a way of compensating for the lower inflows into our financial assets markets from Asia.

In which case --- assuming this happens --- the current anti-globalizing furore and related protectionist sentiments will tend in time to slacken off and keep an open trading system in existence.

An added domestic benefit: Americans would be learning to save more for the long term and get less in debt.


Michael Gordon, AKA, the buggy professor


Michael Gordon, AKA, the buggy professor

At 10/16/2008 7:37 PM, Blogger Mark J. Perry said...

Post has been updated with information on the major currency index.


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