After a 9% decline in the second half of 2020, the broad dollar index – the real effective exchange rate as calculated by the Bank for International Settlements – has gone the other way, soaring by 12.3% from January 2021 through May 2022. And yet the deterioration of the US current-account balance has continued.
NEW HAVEN – I should have listened to Alan Greenspan – at least when it comes to currency forecasting. The former chair of the Federal Reserve once told me it was a fool’s game, with the odds of getting currency calls right worse than a successful bet on a coin toss. Two years ago, I ignored the maestro’s advice and went out on a limb, predicting that the US dollar would crash by 35%.
After a tantalizing 9% decline in the second half of 2020, the broad dollar index – the real effective exchange rate as calculated by the Bank for International Settlements – has gone the other way, soaring by 12.3% from January 2021 through May 2022. That puts the dollar 2.3% above its level in May 2020, around the time I made this seemingly foolish call. How did I get it so wrong?
Three factors shaped my thinking: America’s current-account deficit, Federal Reserve policy, and TINA (“there is no alternative”). I argued that the external deficit was headed for big trouble and that a passive Fed would do little to arrest the problem – effectively forcing the bulk of the current-account adjustment to be concentrated in a weakening currency rather than in rising interest rates. I also took a swipe at the TINA defense of the dollar and tried to make the case for euro and renminbi appreciation.
To continue reading, register now.
Subscribe now for unlimited access to everything PS has to offer.
Subscribe
As a registered user, you can enjoy more PS content every month – for free.
Register
Already have an account?
Log in
NEW HAVEN – I should have listened to Alan Greenspan – at least when it comes to currency forecasting. The former chair of the Federal Reserve once told me it was a fool’s game, with the odds of getting currency calls right worse than a successful bet on a coin toss. Two years ago, I ignored the maestro’s advice and went out on a limb, predicting that the US dollar would crash by 35%.
After a tantalizing 9% decline in the second half of 2020, the broad dollar index – the real effective exchange rate as calculated by the Bank for International Settlements – has gone the other way, soaring by 12.3% from January 2021 through May 2022. That puts the dollar 2.3% above its level in May 2020, around the time I made this seemingly foolish call. How did I get it so wrong?
Three factors shaped my thinking: America’s current-account deficit, Federal Reserve policy, and TINA (“there is no alternative”). I argued that the external deficit was headed for big trouble and that a passive Fed would do little to arrest the problem – effectively forcing the bulk of the current-account adjustment to be concentrated in a weakening currency rather than in rising interest rates. I also took a swipe at the TINA defense of the dollar and tried to make the case for euro and renminbi appreciation.
To continue reading, register now.
Subscribe now for unlimited access to everything PS has to offer.
Subscribe
As a registered user, you can enjoy more PS content every month – for free.
Register
Already have an account? Log in