Minyan Mailbag - DXY
Note: Our goal in Minyanville is to remove intimidation from the financial markets and encourage an interactive dialogue among the Minyanship. We share this next discussion with that very intent.
Editor's note: The following exchange was taken from today's Buzz & Banter.
"Toddo- While the DXY is down 31% over the past 3 years, it is back to the same level it was at in 1995, 1992 and 1990. In fact, pulling up a weekly chart back to 1985, one might argue that we have moved to the low end of the range; a position which dovetails with Mr. Reamer's bullish prognostication. While I share your concerns about the currency, I think it is important to look at the longer term context. Minyan JM."
Point well taken. My comment earlier this morning was particular to the Fed's jawbone that a lower dollar would aid economic growth. I was simply pointing out that there is another--and entirely less popular--side to this coin that is conveniently left out of that dialogue.
I want to make a fundamental comment about Minyan JM's thought that the DXY (dollar index) is around the same level as it was in 1985.
This should not be construed as "things are the same as they were in 1985, so no big deal". Things are actually very different.
The DXY is heavily weighted towards the Euro (57%). The Yen is only 15% of the DXY and the Chinese Yuan is not even included. The main driver of the lower DXY has been the Euro.
To a U.S. investor, the SP500 is up 57% from the October 2002 lows. To a European investor, the SP500 is only up around 21% from its lows.
If you look at a broader basket of currencies like the Fed Broad Index, an index which includes all the Asian currencies and weights the Euro at only 11%, you find that the dollar was at 60 in 1985, it got as high as 130 in 2001, and is currently at 110.
This confirms that the dollar has fallen primarily against the Euro and has remained relatively firm against Asian currencies.
With an extraordinary current account deficit of 6% of GDP, a deficit accruing primarily against the Asian economies, the broader dollar index indicates that the dollar could (should) weaken signficantly further.
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