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Analysis
Dollar's rise reminiscent of Reagan era

Dollar's rise reminiscent of Reagan era

Piquancy but no novelty in currency spat

by Bhavin Patel and Ben Robinson

Tue 7 Feb 2017

US-German exchange rate tussles, just like American attacks on Germany’s disinclination to stoke domestic demand and run of high current account surpluses, have a long history. Adding to the bitterness behind the latest squabbles, the dollar’s annual 10%-plus trade-weighted rise in real terms over the past two-and-a-half years matches the intensity of the dollar’s rises in the early 1980s.

The currency’s surge under President Ronald Reagan – putting the German D-mark under severe downward pressure and harming the competitiveness of US companies – greatly discomfited the German government and Bundesbank and was one of the main reasons why Chancellor Helmut Schmidt was dislodged from power in 1982.

Bhav Man Charts (US Dollar Trade Weighted)

The statistics speak for themselves. The dollar’s drawn out real trade-weighted rise between November 1978 and March 1985 was 44.7%, or 7% annually, compared with 25.6% between May 1995 and August 1998 (7.7% annually), and 26.8% between July 2014 and December 2016 (10.7% annually). On this basis, the dollar’s appreciation since 2014 ranks as one of the sharpest-ever bouts of currency changes. (See comparison with renminbi, sterling and yen fluctuations in the Charts below).

It is small wonder that the Americans are showing signs of irritation. Employees in export-sensitive industries who are most likely to be hit by competitive pressures are those whose livelihoods Trump in his campaign speeches has pledged most vigorously to defend.

There is piquancy, but no particular novelty, in the latest spat.

The allegation by Trump’s trade chief Peter Navarro that Germany is artificially depressing the euro to boost exports has a long pedigree. As long ago as 1978, Jim Callaghan, the British prime minister, told Schmidt that the planned European Monetary System would depress the D-Mark and strengthen the pound, arguing, ‘That would help Germany, not Britain.’ This was one of the main reasons why the UK chose not to join the exchange rate mechanism of the EMS.

Denis Healey, Callaghan’s chancellor of the exchequer, later claimed that a crucial reason for Britain’s hostility was because Manfred Lahnstein, state secretary at the Bonn finance ministry, told him over a glass of beer in Hamburg, ‘The key principle of German economic policy was to persuade the French and Italians to pay to lower the value of the D-Mark so as to make Germany more competitive.’ Lahnstein years later confirmed the statement – but said it was meant to be a joke.

Bhav Man Charts (Sterling Trade Weighted)

Bhav Man Charts (renminbi Trade Weighted)

Bhav Man Charts (yen Trade Weighted)

Bhav Man Charts (euro Trade Weighted)

Signoff BIS

Bhavin Patel and Ben Robinson are Economists at OMFIF.

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