In currency markets, it’s a ‘90s flashback ZZ# Stock
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In currency markets, it’s a ‘90s flashback
Commentary: Reliving America’s ‘comeback’ decade
There’s a distinctly 1990s feel to currency markets right now.
It’s not that Wall Street FX traders are breaking out their grunge clothing
or firing up their 28-bps dial-up modems. It’s that the dollar’s current
moment of global strength looks more like the second half of that go-go
decade than any other period in its recent history.
The Wall Street Journal Dollar index is up 15% from its cyclical low of July
2011. That almost-two-year climb isn’t as big as the 24% surge the
greenback enjoyed between March 2008 and February 2009 or as rapid as its 14
% spike in the six months to May 2010. But those two prior rallies — first
during the U.S. financial crisis, then amid the euro crisis — reflected
anxious investors’ views that the dollar was merely the least mangy beast
in an international ugly dog contest. By contrast, its latest move is
founded on a more fundamental bet that the U.S. economy is improving and has
a rosier outlook than its peers.
Click to Play Play 'The Federator' to find your inner BernankeCould you do
a better job managing the U.S. economy than Fed Chairman Ben Bernanke? WSJ's
new 8-bit video game "The Federator" lets you do just that. Here's a quick
rundown of how to play.
For those of us who covered the U.S. economy in the 1990s, this has a
familiar ring to it. That was the decade of the great American comeback.
After the Gulf War and recession of 1991-92, the U.S. economy gradually
gathered steam until it was firing on all cylinders into the latter half of
the decade. The U.S. economy was king and the dollar was ultimate measure of
that.
Of course, in absolute terms, the comparison with the 1990s is deeply flawed
. At 7.5%, unemployment is now down from its high of 10% in 2009 but it’s
still only equivalent to the peak of the post-recession period in 1992. By
the end of the 1990s, the U.S. jobless rate had dropped all the way to 4.0%
and four months into 2000 it would get as low as 3.8%. Also, the Federal
Reserve’s benchmark federal funds rate only got as low as 3% in the 1990s,
whereas it has been near-zero since late 2008 while the Fed has
simultaneously launched a multi-trillion-dollar supplemental stimulus
program.
But currency traders couldn’t care less about absolutes. They deal in
relative value, on comparisons between countries. They’re also much less
concerned about the past as they are in the future. And by those standards,
the U.S. is looking good.
Read 4 ways the end of QE will surprise anyone.
While the euro zone is mired in recession, Japan is throwing trillions of
newly printed yen at an intractable deflation problem, and once-booming
emerging markets are weakening under the pressure of sluggish Chinese demand
, the U.S. is in recovery mode. Economic improvement still isn’t paying
dividends to millions of un- and underemployed Americans, of course, but the
energy boom, a rapidly rebounding housing market, and a record-breaking
equities market is making the U.S. a magnet for foreign investors. Investors
are placing bets on future growth prospects and this, as much as the
prospects of tighter monetary policy from the Fed, is driving the dollar
higher.
As the epicenter of the Internet boom in the second half of the 1990s, the U
.S. was better placed than anywhere else to exploit the sweeping change in
communications technology, so it extracted impressive productivity gains
from it. Now the revolution is in hydraulic fracturing, or fracking, which
will for many years afford America a distinct advantage in terms of cheap
energy via newly unlocked reserves of shale gas and oil.
That positive productive backdrop, along with a sense that consumers are
slowly starting to recover confidence, provides the foundations for the
dollar’s current rally.
This is not to say there still aren’t jittery moments in which buyers flock
to the greenback as a perceived safe haven, as with during last week’s
sudden selloff in world equities that followed an unwelcome manufacturing
report out of China.
Yet that, too, mirrors the late 1990s, when the strong dollar sucked up all
the flight capital that fled from emerging markets during the Asian crisis.
In both eras, the dollar had the best of both worlds: a winner in good times
and in bad.
The U.S. economy is a long way from being fully healed, but the currency
markets are telling us that at least it’s closer to that objective than
many other countries.
Michael Casey is managing editor for the Americas at DJ FX Trader, a foreign
-exchange news service from Dow Jones Newswires and The Wall Street Journal.
In currency markets, it’s a ‘90s flashback
Commentary: Reliving America’s ‘comeback’ decade
There’s a distinctly 1990s feel to currency markets right now.
It’s not that Wall Street FX traders are breaking out their grunge clothing
or firing up their 28-bps dial-up modems. It’s that the dollar’s current
moment of global strength looks more like the second half of that go-go
decade than any other period in its recent history.
The Wall Street Journal Dollar index is up 15% from its cyclical low of July
2011. That almost-two-year climb isn’t as big as the 24% surge the
greenback enjoyed between March 2008 and February 2009 or as rapid as its 14
% spike in the six months to May 2010. But those two prior rallies — first
during the U.S. financial crisis, then amid the euro crisis — reflected
anxious investors’ views that the dollar was merely the least mangy beast
in an international ugly dog contest. By contrast, its latest move is
founded on a more fundamental bet that the U.S. economy is improving and has
a rosier outlook than its peers.
Click to Play Play 'The Federator' to find your inner BernankeCould you do
a better job managing the U.S. economy than Fed Chairman Ben Bernanke? WSJ's
new 8-bit video game "The Federator" lets you do just that. Here's a quick
rundown of how to play.
For those of us who covered the U.S. economy in the 1990s, this has a
familiar ring to it. That was the decade of the great American comeback.
After the Gulf War and recession of 1991-92, the U.S. economy gradually
gathered steam until it was firing on all cylinders into the latter half of
the decade. The U.S. economy was king and the dollar was ultimate measure of
that.
Of course, in absolute terms, the comparison with the 1990s is deeply flawed
. At 7.5%, unemployment is now down from its high of 10% in 2009 but it’s
still only equivalent to the peak of the post-recession period in 1992. By
the end of the 1990s, the U.S. jobless rate had dropped all the way to 4.0%
and four months into 2000 it would get as low as 3.8%. Also, the Federal
Reserve’s benchmark federal funds rate only got as low as 3% in the 1990s,
whereas it has been near-zero since late 2008 while the Fed has
simultaneously launched a multi-trillion-dollar supplemental stimulus
program.
But currency traders couldn’t care less about absolutes. They deal in
relative value, on comparisons between countries. They’re also much less
concerned about the past as they are in the future. And by those standards,
the U.S. is looking good.
Read 4 ways the end of QE will surprise anyone.
While the euro zone is mired in recession, Japan is throwing trillions of
newly printed yen at an intractable deflation problem, and once-booming
emerging markets are weakening under the pressure of sluggish Chinese demand
, the U.S. is in recovery mode. Economic improvement still isn’t paying
dividends to millions of un- and underemployed Americans, of course, but the
energy boom, a rapidly rebounding housing market, and a record-breaking
equities market is making the U.S. a magnet for foreign investors. Investors
are placing bets on future growth prospects and this, as much as the
prospects of tighter monetary policy from the Fed, is driving the dollar
higher.
As the epicenter of the Internet boom in the second half of the 1990s, the U
.S. was better placed than anywhere else to exploit the sweeping change in
communications technology, so it extracted impressive productivity gains
from it. Now the revolution is in hydraulic fracturing, or fracking, which
will for many years afford America a distinct advantage in terms of cheap
energy via newly unlocked reserves of shale gas and oil.
That positive productive backdrop, along with a sense that consumers are
slowly starting to recover confidence, provides the foundations for the
dollar’s current rally.
This is not to say there still aren’t jittery moments in which buyers flock
to the greenback as a perceived safe haven, as with during last week’s
sudden selloff in world equities that followed an unwelcome manufacturing
report out of China.
Yet that, too, mirrors the late 1990s, when the strong dollar sucked up all
the flight capital that fled from emerging markets during the Asian crisis.
In both eras, the dollar had the best of both worlds: a winner in good times
and in bad.
The U.S. economy is a long way from being fully healed, but the currency
markets are telling us that at least it’s closer to that objective than
many other countries.
Michael Casey is managing editor for the Americas at DJ FX Trader, a foreign
-exchange news service from Dow Jones Newswires and The Wall Street Journal.