The Course Of The Dollar

We tell our students not to read too much into the strength or weakness of a currency. However, the dollar’s trajectory since November 2016 is quite striking.

Here is the trade weighted real value of the US dollar against a broad basket of currencies, through December 2017.

Figure 1: Real value of US dollar against broad basket of currencies, 1973M01=100, on log scale. NBER defined recession dates shaded gray. Source: Federal Reserve via FRED, NBER.

It is interesting that as of December the dollar is now 2.6% weaker (log terms) than it was in October 2016; it was 6.5% weaker than the peak in January 2017.

This occurs against a backdrop of an expansionary fiscal policy, suggesting (1) the tax bill is not particularly stimulative, and (2) further stimulus by way of for instance an infrastructure bill has been discounted.

A weakening dollar will be helpful for keeping the trade deficit from expanding further than it otherwise would’ve. (So the question the President asked General Flynn during his short-lived stint as national security adviser was a good one!)