So why is the dollar so strong today? Three reasons. First, the US economy is on fire. It has shrugged off the last two years’ rising interest rates, creating new jobs, increasing wages and keeping a lid on unemployment. Money follows growth.
The second reason is those interest rates, which are showing no signs of pivoting lower anytime soon as inflation remains stubbornly above target. Higher yields attract yet more global money flows. Finally, the dollar is a safe haven. Always has been. And today’s worrying geopolitics make the greenback look ever more like a port in the storm.
This all feels eerily familiar. When I went to study in America in 1985, my university teaching assistant’s stipend felt like a king’s ransom at the then-exchange rate of about $1.20 to the pound. A dollar was worth 80p then. Five years earlier it would have bought just 40p.
Half a decade of tight monetary policy under the Fed’s determined chair, Paul Volcker, and loose fiscal policy in President Ronald Reagan’s first term had pushed up bond yields and attracted global capital flows. Then as now, you wanted to be earning dollars, not trying to buy them.
At first, the US government was in favor of a strong dollar. It made Volcker’s job of getting on top of inflation that bit easier. But American industry was suffering, the trade deficit was soaring, and Congress was drawing up protectionist legislation to backstop domestic manufacturers. The stage was set for the world’s finance ministers to get together in New York’s Plaza Hotel and thrash out a co-ordinated devaluation of the dollar.
