By Alexander Monge-Naranjo, Research Officer and Economist, and Hee Sung Kim, Senior Research Associate
During 2017, the value of the U.S. dollar fell relative to other main currencies. This weakening of the U.S. dollar has been the subject of recent debate. For example, see Wayne, Alex; and Hunter, Kathleen. “Mnuchin Defends Weaker Dollar Comments as ‘Clear,’ ‘Consistent.’” Bloomberg, Jan. 25, 2018. The debate has highlighted the positives and negatives of a weaker dollar:
Most interestingly, the weakening of the U.S. dollar accelerated at the beginning of 2018. The following figures show the evolution of the dollar against other currencies from January 2017 to March 2018. Each graph displays the daily values of one U.S. dollar in terms of the respective foreign currency. The blue lines indicate the actual prices for each day, while the orange lines are the smoothed trends for the exchange rates. The trends were computed using the standard Hodrick-Prescott filter with lambda set at 100,000, the usual value for daily observations.
A number of interesting patterns are evident.
First of all, the U.S. dollar depreciated during most of 2017 against most of the main currencies. Given the resumption of interest rate hikes during the year—and the prospect of additional hikes in 2018—this behavior is very different from the one observed during the “taper tantrum” of 2013.
Second, the depreciation of the U.S. dollar accelerated at the turn of 2018. This acceleration is substantial for some currencies. Such a behavior is remarkable in light of then-recently approved changes in corporate taxes in the U.S., which would suggest higher net returns for U.S. investments.
Third, with the exception of Japan, the dive of the U.S. dollar’s value subsided in late February/early March. However, with the exception of Canada, the value of the U.S. dollar was substantially lower in early March 2018 than at the beginning of the year.
The fundamental questions underlying these interesting observations are:
1 For example, see Wayne, Alex; and Hunter, Kathleen. “Mnuchin Defends Weaker Dollar Comments as ‘Clear,’ ‘Consistent.’” Bloomberg, Jan. 25, 2018.
2 Each graph displays the daily values of one U.S. dollar in terms of the respective foreign currency. The blue lines indicate the actual prices for each day, while the orange lines are the smoothed trends for the exchange rates. The trends were computed using the standard Hodrick-Prescott filter with lambda set at 100,000, the usual value for daily observations.
Additional Resources
The St. Louis Fed uses Disqus software for the comment functionality on this blog. You can read the Disqus privacy policy. Disqus uses cookies and third party cookies. To learn more about these cookies and how to disable them, please see this article.