Dollars and sense, and other laments

“Reports of my death are an exaggeration,” the writer Mark Twain told a reporter after rumours of illness and an untimely demise surfaced.

The same is true for the US dollar, which is quite frankly in rude health today even though ‘de-dollarisation’ is one of the buzzwords of the past two years.

In thinking about the dollar, it is important to distinguish between cyclical and structural issues. Cyclically, the greenback has rallied in recent weeks, and is back near 20-year highs on a trade-weighted basis. Against individual currencies, the dollar rallied from $1.12 euro in early July to $1.05 at the end of last week. Meanwhile, the yen fell to the symbolically important JPY150 per dollar level, before apparently triggering an intervention by the Japanese government. The Chinese yuan is hovering at a multi-year low at CNY7.3 per dollar.

This is largely a function of interest rate expectations. The gap between US interest rates on the one hand, and those of Europe, Japan, China and other major economies on the other hand, seems unlikely to close in the short term. Indeed, it might be widening as the US economy is clearly in better shape than its counterparts elsewhere. Friday’s blockbuster jobs numbers show that US employers still have strong demand for workers.

Click here to read more...