December 1, 2023

Some See Rise Ahead for Dollar

For the better part of the past decade, and particularly in the last few months, the American dollar has been the 98-pound weakling of the foreign exchange world. It has lost value against almost every other global currency — not just the euro, pound and yen but even the Romanian new leu and the Latvian lats.

Driven largely by the Federal Reserve’s policy of printing dollars to help spur a healthy economic recovery that remains stubbornly elusive, the dollar, weighed against a basket of other currencies, hit a 40-year low this month.

But betting against the dollar may no longer be such a safe play — not necessarily because of any sudden macroeconomic shifts but because of a sense that the long dollar sell-off may have finally gone too far.

Since May 4, the dollar is up 4 percent against the euro and 2 percent against the pound, while rallying against the Romanian and Latvian currencies as well.

 The dollar’s bounce, though too brief to be called a trend, has not been driven by any noticeable improvement in America’s economic fundamentals. Indeed, the faint but real risk that Congress will fail to reach agreement on raising the legal ceiling on government borrowing only underscores the still parlous state of the American economy.

At the same time, unemployment in the United States remains stubbornly high, at 9 percent. And there is a strong belief among big money investors that the Obama administration as well as the Federal Reserve chairman, Ben S. Bernanke, tacitly welcome a cheaper dollar to spur exports and encourage American manufacturers to hire more aggressively.

“The U.S. economy is still facing headwinds — from weak housing to reductions in government spending,” said Ray Attrill, a currency strategist for BNP Paribas in New York. “For those reasons, we think the export sector is where policy makers are looking for growth.”

But analysts also see another, more technical reason behind the dollar’s long decline — one that may well be ending. Ever since the global financial crisis began to ease in 2009, the appeal of investing in higher-yielding currencies and commodities all over the world has created what, in trader parlance, is called a risk-on, risk-off dynamic.

Investors tend to sell their safer holdings, like United States Treasury bonds, when they feel more bullish. Because 90 percent of the world’s hedge funds are dollar-based, those changes in sentiment can have a depressing effect on the American currency. Reserve-rich central banks in emerging markets have also been selling dollars and buying euros to rebalance their reserve portfolios, said Mr. Attrill, citing recent data from the International Monetary Fund.

“Everything has been strengthening against the dollar — this is something that has not happened in the past,” said Stephen L. Jen, an independent currency strategist and former economist for the International Monetary Fund.

But that momentum now appears to have swung too far to one side — particularly as Europe’s own debt problems return to the limelight. Mr. Jen sees the euro’s rise to a high of $1.49 from $1.19 over the last year as overdone,  especially in light of the festering problems in Greece and other weak euro zone economies. Even now, the euro is back down to $1.42.

“With its sovereign debt issue and the growth differential in the euro zone,” Mr. Jen said, the euro is “just too expensive.”

Other analysts also have begun to say enough already.

In part, that is because much of the dollar’s recent weakness was driven by the perception that the European Central Bank, and to a lesser extent the Bank of England, were more likely to raise interest rates to keep inflation under control than was the Federal Reserve, which remains committed to keeping short-term interest rates near zero. With rates likely to be higher in Europe than in the United States, traders moved their money out of United States government bills and bonds to gain greater returns abroad.

But the stronger the euro got, the more likely is became that its rise would begin to bite back. As the euro rose to nearly $1.50, the strength of the currency started to raise doubts about whether the mighty German export machine, which gained competitive strength when the euro was weaker, could continue to perform so successfully around the world.

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Off the Charts: A Jobs Recovery Faster for Some Than Others

While much of Europe has been struggling to recover — and countries in financial difficulty have been forced to adopt austerity programs that are likely to stifle economic growth, at least in the short term — German unemployment is at its lowest level since German unification nearly two decades ago.

The accompanying charts show the changes in unemployment in nine countries, as well as for the 34 countries in the Organization for Economic Cooperation and Development as a group. They show both the change in the unemployment rate since September 2008 and the change in the number of people out of work. The O.E.C.D. includes major industrialized countries and some leading developing economies.

In Germany, the number of unemployed workers rose 6 percent in the first year after the collapse of Lehman Brothers turned a relatively mild slowdown into what became know as the Great Recession. But the number now has fallen 15 percent below the level of September 2008.

Among the other countries in the O.E.C.D., Luxembourg is the only one to recover all its losses.

The relatively small rise in joblessness in Germany may have been partly because of government programs that encouraged companies to keep workers on reduced hours rather than let them go. The rapid recovery reflects the strength of the German export sector, which was enhanced by the fact that many European countries lost competitiveness because of rising labor costs.

When the downturn began, Germany had about 25 percent of the population in the euro zone and a similar share of the unemployed workers. Its population share is about the same now, but it has only 17 percent of the unemployed.

If the euro zone were a fiscal union rather than just a monetary one, there would have been automatic subsidies through unemployment benefits and other programs for the weaker areas. If there were easy labor mobility in the zone, more workers would have moved to Germany. If there were separate currencies, the German mark would have appreciated against the other European currencies.

As it is, none of that happened. Many Germans resent the need to bail out other countries, and many people in those countries resent being forced to cut wages and payrolls in the name of restoring competitiveness.

The unemployment figures show how much the labor situation has worsened in Ireland and Greece, the first two countries to seek bailouts. But it may be a surprise that unemployment in the Iberian peninsula is worse in Spain, which has not needed help, than in Portugal, which does need assistance. Similarly, France and Italy have seen joblessness rise at roughly the same pace, although Italy is widely thought to be in worse shape economically.

The other chart shows two major countries not in the euro zone. Unemployment grew faster in the United States than in Britain, but Britain has shown little improvement while the United States has begun to recover.

Floyd Norris comments on finance and the economy on his blog at

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