What’s up w th the currenc es?
Why is the dollar so weak and should we ‘chase’ this weakness by lowering our dollar forecasts still further? We simply believe that the currency narrative has changed. After years of being obsessed with monetary policy and rate differentials it looks as if the foreign exchange market might have gone back 20 years, or more, to a time when trade tensions were high, monetary policy was ignored – and the dollar was falling. In the late 1980s and early 1990s, there were two things that seemed to undermine the dollar: pressure on Japan to refrain from ‘unfair’ trade practices and an official bias for a weaker dollar left over from the 1985 Plaza accord (the later Louvre accord in 1987 saw finance ministers express a desire for currency stability, but not dollar strength). Japanese officials pleaded with U.S. officials for help in supporting dollar/yen, but the U.S. seemed to use dollar weakness as a bargaining chip to draw concessions out of Japan. In the mid-1990s, the US relented, the ‘strong dollar’ policy was adopted, and global trade openness increased significantly as the newly-formed WTO (from 1995) got to work. Fast forward to today and things seem different, but still the same. China is now the chief target, not Japan, and rather than support a multilateral organisation such as the WTO, the current administration seemingly wants to reform or even distance itself from such institutions. (January 26)