The depreciation of the dollar was one of the market surprises of 2017, defying the predictions of many analysts and economists at the start of that year.
Continued weakness in 2018 has led some, including European officials, to warn about possible detrimental effects on growth. They are highlighting what may be thought of as the foreign exchange markets’ “hot potato” syndrome — no one appears able or willing to navigate the growth and trade consequences of a meaningful and durable appreciation of their currency.
Although these concerns are understandable and unlikely to go away soon, significant further dollar depreciation is far from a given. Moreover, it is in the power of Europe and Japan to deal with the spillover effects of recent foreign-exchange moves, though the situation does complicate the immediate policy issues facing both the Bank of Japan and the European Central Bank.
When measured by the DXY index, the dollar’s value against other currencies dropped 10 percent in 2017, with another 1.5 percent decline so far this year. These moves have confounded many analysts, especially those who focus primarily on U.S. economic and policy developments. After all, the Federal Reserve has ended up hiking rates more than the markets predicted a year ago, and the economy has grown faster than most anticipated — outcomes that would normally lead to an appreciation of the currency.
True, a year ago, President Donald Trump warned that a greenback that is too strong would have deleterious effects on U.S. growth, trade and jobs. Those comments led to an immediate depreciation. But another contributor to the currency’s surprising evolution is what has been happening abroad, including in Europe.
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