From Barron's. July 25:
A long-anticipated downturn in the U.S. currency has begun, but don’t confuse it with a shift in the dollar’s global role, writes Marc Chandler in a guest commentary.
About the author: Marc Chandler is chief market strategist for Bannockburn Global Forex, a division of First Financial Bank.
The dollar’s long-anticipated downturn has begun, but don’t confuse it with the talk of dedollarization. That remains exaggerated.
The greenback’s structural function in the global economy remains intact and does not stem from its leading role in invoicing or settling trade. It ultimately arises because many countries and foreign companies have borrowed dollars not from the U.S. government but in the offshore market.
The dollar is on one side of about 90% of the trades in the $7.5-trillion-a-day foreign exchange market. Trends there often last five to 10 years, unlike stock and bond markets, which seem more closely tied to the business cycle. The dollar’s bull market, which we think has ended, has gone long and far.
On a broad, trade-weighted basis, there have been three significant dollar rallies since the end of Bretton Woods on Aug. 15, 1971. The most recent began toward the end of the 2008-09 financial crisis. According to the Organization for Economic Cooperation and Development’s measure of purchasing-power parity, the dollar has recently reached historic heights against several currencies, including the Japanese yen and the euro.
The dollar wasn’t this overvalued in September 1985, when France, Japan, the United Kingdom, the U.S., and West Germany met at the Plaza Hotel in New York and agreed to jointly drive it down, ending the first post–Bretton Wood’s dollar rally. Incidentally, coordinated intervention also helped mark the end of the second post–Bretton Woods dollar rally in 2000.
This year, Japanese and other central banks intervened to stem the dollar’s rise, providing a pushback against race-to-the-bottom narratives. But there was no coordinated effort. The dollar’s supercycle isn’t being murdered. It is dying of old age.
A favorable mix of easy fiscal policy and tight monetary policy has fueled the dollar’s rally in the past few years. That is coming to an end as economic growth slows and price pressures moderate. While neither the presidential candidates nor Congress seem ready to tackle fiscal policy, monetary policy is about to change....
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