The Not-So-Almighty U.S. Dollar

The dollar is pennies away from being equal to €1 for the first time since 2002. U.S. manufacturers fret that the stronger currency will kill their sales. Yet American policymakers seem blasé. Secretary of the Treasury Jacob Lew says a strong dollar is in America’s interest, and Federal Reserve Chair Janet Yellen, at her March 18 press conference, said it “reflects the strength of the U.S. economy.”

Why aren’t U.S. officials complaining about being on the wrong end of a currency war? Two reasons. First, the dollar’s rise is primarily the result of market forces and ordinary monetary policy, not market manipulation. Second is that—surprise!—the dollar hasn’t actually risen much, all things considered. “The perception of the dollar’s rise tends to be overstated,” says William Cline, a senior fellow at the Peterson Institute for International Economics in Washington. He’s a veteran of currency turmoil; he worked for the Department of the Treasury for two years starting in September 1971, a month after President Richard Nixon roiled the foreign exchange markets by suspending the convertibility of dollars to gold. The “Nixon Shock” caused the dollar to fall against gold and other currencies, angering trading partners.

It’s true that over the past year the dollar has risen 29 percent against the euro, which was worth $1.08 as of March 18, but it’s gone up considerably less against some other important currencies, such as the Chinese yuan. The right way to judge the dollar’s value is to look over a long period, consider all of the countries the U.S. trades with rather than cherry-picking one or two, and take inflation into account. The Federal Reserve’s broad, inflation-adjusted dollar index, which dates to 1973, does all of those things. It shows that while the dollar is indeed up 15 percent from its 2011 low, it’s still 17 percent lower than it was in early 2002. And it remains 27 percent lower than it was in March 1985, when the dollar’s extreme overvaluation was killing U.S. manufacturers. “It’s not a catastrophic shock,” says Charles Collyns, chief economist for the Institute of International Finance in Washington and a former Treasury official.

Bloomberg

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