The Rise of the Dollar

When I was growing up as a kid I remember they had TV commercials against Jimmy Carter explaining how the dollar declined vs. other currencies over the decades. In the late 1980’s the Japanese Yen soared in value until their market crashed in 1989. The Euro was originally near parity with the dollar, then fell to 70 cents on the dollar (I happened to be in Europe at the time, it was great), then rose to over $1.30 against the dollar.

In general if you keep your portfolio all in US assets you are essentially “100% long” against the dollar. A few years ago the dollar effectively fell almost 40% vs. many of the worlds’ major currencies – this is the time when the Canadian and Australian dollar almost reached parity with the US dollar. For US citizens who traveled frequently across the border into Canada, it seemed strange to think of the Loonie as being just the same as a US dollar, since for years it was worth substantially less. Thus if your portfolio was all in US dollar denominated assets, your value fell 40% that year vs. the worlds’s currencies, even though you couldn’t “feel” it unless you traveled abroad or tried to buy imported goods.

Recently, however, this has all turned around. The dollar is soaring vs. most of the world’s currencies, which is good news for travelers and makes imports cheaper. However, those who own foreign stocks are looking at losses regardless of how the underlying stock performs (often many of the underlying foreign businesses IMPROVE when the US dollar rises; for instance Indian outsourcing firms who are paid in US dollars find that this money stretches further when paying their Indian based staff in rupees), just because of the rising dollar.


It is controversial but many central banks are taking steps to effectively debase or reduce the value of their currency in order to keep their export economies competitive. This is essentially the strategy of Japan. On the other hand, some countries are faced with dire circumstances due to the fall in their currencies, which causes inflation locally and can crush banks and those who take out home loans and bank loans denominated in foreign currencies (a surprisingly common overseas practice, although the down side is clearly on display in countries like Russia where a 50% fall in the ruble means that your mortgage just doubled). Some countries like Venezuela and Argentina are in extreme shape and basic goods are not available on the shelves and local manufacturing has mostly seized up; this happens when you stop the flow of dollars outside the country and try to prop up your local currency regime (and lack credibility).

Finally, while everyone thinks the Fed is going to raise interest rates at some point, now we need to think of the impact on the dollar. All else being equal, raising interest rates is going to make the dollar even stronger against its peers, especially as those countries remain in a zero interest rate environment (ZIRP). Given the huge rise that the dollar has already seen, further increases will make exporters even less competitive on the world stage.

I am reading a few books on currency wars and I didn’t realize that the US and Saudi Arabia had an explicit deal where the US provided security as long as the Saudis invested their excess in US Treasury bonds and denominated the world price of oil in dollars and not any other currencies. This gave rise to the term “petro dollars”. While I had heard the term many times I did not realize that this was an explicit not implicit relationship. Even today oil is denominated in dollars, although Putin and the Chinese are working to change that over time with their own bi-lateral relationship (which is running into a rough patch with the fall in the ruble recently, but obviously has long term potential given Russia’s huge resource pool and China’s voracious demand for commodities).

Cross posted at Chicago Boyz


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