The trade-weighted dollar, measured against a basket of global currencies, has lost 7% of its value over the past year despite strong US economic growth and soaring stock prices on Wall Street. That partly reflects the outlook for inflation, and therefore interest rates, but also perhaps a more nebulous sense that the US policy framework is not as solid and predictable as it may once have been.
Well, yes, etc etc.
But nowhere does she mention tariffs. Which is really pretty important. Because whjolly standard theory and observation says that the imposition of tariffs raises the FX rate. So, given The Donald’s love of tariffs the $ FX rate should be rising. Which means that the fall is doubly surprising. Something that really should be mentioned…..
“standard theory and observation says that the imposition of tariffs raises the FX rate”.
Except in this case it has not. ‘Paging Mr. Feynman and Mr.Einstein…….’.
Exactly, that’s the interesting thing that needs to be explained, which she doesn’t.
It’d be interesting to know the suggested mechanism that supposedly causes this. It’s not obvious.
BiS, I think it’s this:
The point of tariffs is to sell more to foreigners and/or buy less off them (relatively, net).
So if the tariffs work, there’s more people needing to buy your currency (to buy your stuff off you), and fewer of your people selling your currency (to buy stuff off foreigners).
More buyers, more sellers, and so the price of your currency goes up (on average, relative to other currencies).
It’s also why tariffs don’t work in the long term, because your currency goes up, which makes it harder to export and cheaper to import, until it counteracts the effect of the tariffs.
It’s in Sir William Petty’s “Quantulumcunque concerning money”, from 1682:
“Will more Silver be carried out of England … to the Damage of England?
“Answer: Somewhat more: But none to the Damage of England … but rather to its Profit … if he [the Merchant] bring home as much Pepper as an English man will give him 200 of the like Shillings for, the Merchant and England shall both Gain by Exporting the 100 Shillings.”
Tim will say if I’ve got that wrong; the explanation may have moved on a bit in the last 350 years.
“the explanation may have moved on a bit in the last 350 years.”
If it has Tim won’t be aware of it.
Tee hee.
No, that works for me.
There is a more modern idea. Tariffs produce inflation, these days with independent central banks that means higher interest rates, FX is driven by (real) interest rate differentials thus….
I prefer the older explanation.
“Science advances one headstone at a time.”
I suspect this is true of economics as well.
Economics doesn’t advance, it goes round and round in circles chasing its own tail. And is about as useful as a dog that does exactly that…..
“For now, US Treasuries remain the asset many investors run to when times get scary. Yields fell on Friday as investors sought refuge from fears of a software share price crash.”
i.e. foreignors bought more US dollar assets
That is hardly an *acceleration* of the “drift from dollar dominance”
One sometimes wonders whether the Grauniad writers can truly be that stupid.
Louis B. Mayer’s famous aphorism comes to mind.