THE DOLLAR IS AT ITS STRONGEST SINCE THE 1980´S. CAN IT LAST? / THE WALL STREET JOURNAL

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

The U.S. dollar has defied analysts’ expectations and appreciated again this year relative to a basket of other currencies. PHOTO: AMR ABDALLAH DALSH/REUTERS

For a decade now, currency markets have been ruled by the strengthening dollar. 

But no kingdom lasts forever.

Contrary to what many on Wall Street expected, the U.S. dollar has gotten a fresh wind this year, as bumpy inflation data has prompted investors to dial back bets on rate cuts. 

Measured against other currencies, the greenback is still below the recent 2022 peak when an aggressive Federal Reserve was raising interest rates. 

But it remains historically expensive in inflation-adjusted terms—just 10% shy of the level at which Richard Nixon ended gold convertibility in 1971, for example, according to data from the Bank for International Settlements. 

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 in a meeting with officials from Britain, Germany, France and Japan in the Plaza Hotel in New York. 

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

Something similar could happen again on a smaller scale, particularly if Donald Trump wins the presidential election in November. 

His economic advisers have in the past advocated for a weaker greenback to narrow the U.S. trade deficit, especially relative to the yuan, which is currently under pressure as foreign investors flee low-yielding Chinese bonds.

Perhaps more important, economic growth is accelerating beyond America’s borders. 

This has historically provided the conditions for the greenback to weaken. 

Recent economic data suggests that the eurozone and Japan are finally turning up, and China’s recovery seems to be building momentum. 

Beijing is actively intervening to push up the yuan. 

All this suggests it is a good time for dollar-based investors to think about shifting more money overseas.

A fall in the dollar usually greases the wheels of global growth. 

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. 

Even if a weaker greenback is an effect of broadening economic growth rather than a cause, it remains a bullish signal for international stock markets, which have a greater percentage of so-called cyclical companies. 

European banks, which are on a tear, are a good example.

Overseas stocks haven’t experienced this tailwind much since the global financial crisis. 

As the dollar’s inflation-adjusted value has risen 35% since the end of 2009, the MSCI EAFE Index, which tracks developed markets outside of North America, has only returned about 200%, compared with roughly 500% for the S&P 500. 

In the only recent spell when the dollar was depressed, between 2020 and mid-2021, U.S. stocks bafflingly raced ahead even more, buoyed by technology giants reaping pandemic gains.

This has understandably conditioned investors to call it quits and just put all their eggs in the American basket.

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.

History never repeats itself precisely, and investors shouldn’t be waiting for the monumental dollar selloff that followed the Plaza Accord. 

But neither should they assume the U.S. currency can rise forever.