The Dollar Is at Its Strongest Since the 1980s. Can It Last?

The greenback is historically very expensive amid a recovery in global growth and a fraught election campaign

By Jon Sindreu of The WSJ. Excerpts:

"bumpy inflation data has prompted investors to dial back bets on rate cuts." [when U.S. interest rates rise, foreign investors might want to buy more U.S. bonds. To do that they need to buy more dollars and this increase in the demand for dollars raises its value]

The dollar "remains historically expensive in inflation-adjusted terms—just 10% shy of the level at which Richard Nixon ended gold convertibility in 1971"

"It hasn’t been so consistently strong since the 1980s when the Fed was headed by Paul Volcker, the epitome of the hawkish central banker."

"In 1985, the dollar rose so much that U.S. officials became worried about the blow it was dealing to domestic manufacturers. Famously, they agreed to coordinate its depreciation" [when the value of the dollar is high it is more expensive for foreigners to buy U.S. goods. So some U.S. companies are hurt. On the other hand, close to half of what we import are resources American companies use to produce goods and services, so some other companies are helped because they can buy resources more cheaply]

"By 1988, it had lost a third of its real value."

Donald Trump's "economic advisers have in the past advocated for a weaker greenback to narrow the U.S. trade deficit, especially relative to the yuan"

"Perhaps more important, economic growth is accelerating beyond America’s borders. This has historically provided the conditions for the greenback to weaken."

"Roughly half of trade invoices and three-quarters of nonbank debt are denominated in dollars, which means that emerging nations in particular—those that struggle to borrow in their own currencies—get a boost whenever the U.S. currency cheapens."

"To be sure, the dollar’s elevated real exchange rate compared with the past may be somewhat deceptive: Adjusting for inflation is tricky because most products aren’t traded across borders. When it comes to energy, which does have a huge impact, the U.S. has switched from being a net importer to a net exporter, thanks to the shale revolution of the 2010s.

Additionally, Washington’s recent turn to industrial policy has triggered a wave of foreign direct investment into the U.S. Economic theory also predicts that the recent tariffs imposed by Washington should push the currency up, and recent research backs this up to an extent."

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