10
#
October 2015
7 Three questions about the rise
The essential
of the US dollar
bastien drut, Strategy and Economic Research – Paris
The US dollar has risen sharply since
the summer of 2014: approximately
14% in real effective terms and just
over 20% in nominal effective terms.
Why is it rising? What is it rising
against? Is it overvalued?
The US dollar has risen sharply since the summer of 2014. In this article,
we offer an analysis of the reasons behind this rise and the ways it differs
from previous appreciation cycles. In particular, we will see how the emerging
currencies have taken on a much greater role than before.
Why is the US dollar rising?
The appreciation of the US dollar can
mainly be attributed to the divergence of
monetary policy and to the deterioration
of growth prospects in the emerging
countries. The emerging currencies play
a much greater role in the US dollar's
current appreciation than they did in
previous cycles. Although it has already
risen substantially, the US dollar retains
some room for further appreciation in the
coming months.
Apart from the Bank of England, the Fed is the only central bank in the
developed world that could conceivably tighten monetary policy for the 20152016 period. Other major central banks have recently expanded monetary
easing and could go even further in this regard (the ECB, BoJ, PBoC, BoC,
RBA, RBNZ, Riksbank, Norges Bank ... the list is long). This divergence of
monetary policy is the main cause behind the strong appreciation of the
US dollar's real exchange rate since the summer of 2014.
The original catalyst for the US dollar's rise was the sharp rise in Fed funds
projections (the "dots") in September 2014, when the members of the FOMC
moved their Fed funds projections for the end of 2016 from 2.5% to 3%. The
FOMC members have been lowering their "dots" at a steady pace since then.
Nonetheless, the Fed seems likely to hike its key rates for the first time in nearly
10 years at its December FOMC meeting.
Many emerging currencies had already depreciated against the US dollar in
the months following Ben Bernanke's
the Fed
n°
Frenchannouncement
version in May 2013 thatGraph
may scale back its asset purchases (an event known as "QE tapering").
n°1
It would be a mistake
to focus exclusively on the EUR/USD exchange rate to
25
assess the latter's appreciation.
while the EUR/USD rate has been more
AutresIndeed,
G10
or less stable at around 1.10
since
early 2015, the US dollar has appreciated
EM
Asie
20
steadily in effective terms (with
CNY the exception of the second quarter, when the
markets had to digest very Latam
poor Q1 data for the United States).
15
MXN
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11-13
01-14
03-14
05-14
07-14
09-14
11-14
01-15
03-15
05-15
07-15
09-15
To properly measure a currency's performance, its evolution should be
JPY
contrasted against
of other currencies. In the case of the US dollar,
10 a basketCAD
the basket of currencies used
by the Fed is particularly relevant. This is
EUR
because the Fed reviews the weightings of the various currencies each year
5
based on the countries' shifting share of trade volumes with the United States.
The Chinese yuan, which had a weight of less than 1% in the early 1970s, now
represents 21%. 0The most important currencies in the Fed's current basket
are, in descending order, the yuan (21%), the euro (16%), the Canadian dollar
-5 peso (12%) and the yen (7%). All other currencies have a
(13%), the Mexican
weight of less than 4%.
Between the summer
of 2014Recherche
and the
end of September 2015, the US
Source : Datastream,
Amundi
dollar's nominal effective exchange rate rose by approximately 20%. But as
can be seen in the graph opposite, which represents the contribution of the
various currencies to the effective appreciation of the US dollar since 2014,
Taux de change réel effectif (BRI, 100 = moyenne sur
the US dollar's rise against the euro contributed only about 12%
n°2 to
la période 1994-2015)
this movement. This differs from the US dollar's previous appreciation
cycle (1996-2001),
150 during which the euro's depreciation accounted for
approximately one-third of the USD's riseCNY
in effective terms.
140
USD
Currency trends in the neighbouring countries should not be overlooked, as
130
EUR
the Mexican peso
and Canadian dollar jointly
account for about one-third of
JPY
the US dollar's effective
appreciation since mid-2014.
The Canadian dollar has
120
been under pressure from rate cuts by Canada's central bank coupled with the
110
decline in oil prices. Meanwhile, lower oil prices and the prospects of policy
tightening by the100
Fed have hurt the Mexican peso.
30
Breakdown
by currency
of the
of the
Breakdown
by currency
ofevolution
the evolution
nominal
effective
USDUSD
sincesince
2013 2013
of the
nominal
effective
1
25
Other G10
EM Asia
CNY
Latam
MXN
JPY
CAD
EUR
20
15
10
5
0
-5
01-13
03-13
05-13
07-13
09-13
11-13
01-14
03-14
05-14
07-14
09-14
11-14
01-15
03-15
05-15
07-15
09-15
Décomposition de l'évolution du taux de change
What is the US dollar
rising
against?
nominal
effectif
du dollar depuis 2013
English version
Source: Datastream, Amundi Research
Real Effective Exchange Rate (BIS, 100 = average for
the period 1994-2015)
150
140
CNY
The United States'USD
real
EUR
effective exchangeJPY
rate
120
only recently exceeded
110
its long-term average
100
130
90
90
80
80
70
70
Document for the exclusive attention of professional clients, investment services providers and any other professional of the financial industry
00
00
-5
-5
-5
-5
Source
Datastream,
Recherche
Amundi
Source ::: Datastream,
Datastream, Recherche
Recherche Amundi
Amundi
Source
Source:
Datastream,
Amundi
Research
Source: Datastream,
Datastream, Amundi
Amundi Research
Research
Source:
Taux
de change
changeof
réel
effectif
(BRI,
100 == moyenne
moyenne
sur Mexican peso
Nearly all of theTaux
depreciation
the
euro,(BRI,
Canadian
dollar and
de
réel
effectif
100
sur
n°2
n°2
la période
période
1994-2015)
la
1994-2015)
took place between the summer
of 2014
and March 2015. While there may be
room for these three currencies to decline further against the USD, much of
150
150
their depreciation
potential seems to have been
CNY exhausted.
CNY
140
140
USD has been especially marked
Since May 2015,
the US dollar's appreciation
USD
130
EUR
against the emerging
currencies, particularly
with the renewed fall in
130
EUR
commodity prices.
Thus, while the devaluation
JPYof the yuan had a very marginal
JPY
120
120
impact on the rise
in the US dollar's effective exchange rate, China's slowdown
110
served to push 110
up the USD as emerging currencies took a tumble.
CNY
CNY
USD
USD
EUR
EUR
140
140
130
130
JPY
JPY
120
120
110
110
If we observe the four major monetary regions—the United States, the eurozone,
China and Japan—we can see that the only major currency with potential for
appreciation is the US dollar. Since the Great Recession, exchange rate adjustments
have favoured the real
appreciation
of de
thedevises
yuan. suivi
China
been the big loser
Poids
dans le
le panier
panier
parhas
la Fed
Fed
n°4 in
Poids
dans
de devises
suivi par
la
n°4
the post-2008 currency movements, as the US dollar has continued to appreciate
in nominal terms25against the yuan. In real terms, China's currency has risen 38%
25
since August 2008,
compared to only 13% for the US dollar, while the yen and euro
have shed 16% and
18%, respectively. Such sustained real appreciation no longer
20
20
looks realistic for China, which faces numerous internal imbalances. Meanwhile,
deflationary pressure
is preventing the eurozone and Japan from effectively
15
15
absorbing an appreciation of their currencies. The ECB has already announced that
10
it would beef up 10
its monetary policy if this were to ever occur.
90
90
80
80
70
70
60
60
Source:
Datastream,
Amundi
Research
Source: Datastream,
Datastream, Amundi
Amundi Research
Research
Source:
US: real
real effective
effective exchange
rate (calculated
(calculated by
the
US:
US: real exchange
effectiverate
exchange
rateby the
Fed)by the Fed)
Fed)
(calculated
3
140
140
REER
REER
130
130
Long-term average
average
Long-term
120
120
110
110
100
100
4
2015
2015
2015
2009
2009
2009
2012
2012
2012
2003
2003
2003
2006
2006
2006
Source:
Fed,
Amundi
Research
Source: Fed,
Fed, Amundi
Amundi Research
Research
Source:
1997
1997
1997
2000
2000
2000
1991
1991
1991
1994
1994
1994
80
80
1985
1985
1985
1988
1988
1988
90
90
1979
1979
1979
1982
1982
1982
2015
2015
2015
2009
2009
2009
2012
2012
2012
2003
2003
2003
2006
2006
2006
Source
Fed,
Recherche
Amundi
Source ::: Fed,
Fed, Recherche
Recherche Amundi
Amundi
Source
1997
1997
1997
2000
2000
2000
1991
1991
1991
1994
1994
1994
1985
1985
1985
1988
1988
1988
150
150
1994
1994
1994
1995
1995
1995
1996
1996
1996
1997
1997
1997
1998
1998
1998
1999
1999
1999
2000
2000
2000
2001
2001
2001
2002
2002
2002
2003
2003
2003
2004
2004
2004
2005
2005
2005
2006
2006
2006
2007
2007
2007
2008
2008
2008
2009
2009
2009
2010
2010
2010
2011
2011
2011
2012
2012
2012
2013
2013
2013
2014
2014
2014
2015
2015
2015
1994
1994
1994
1995
1995
1995
1996
1996
1996
1997
1997
1997
1998
1998
1998
1999
1999
1999
2000
2000
2000
2001
2001
2001
2002
2002
2002
2003
2003
2003
2004
2004
2004
2005
2005
2005
2006
2006
2006
2007
2007
2007
2008
2008
2008
2009
2009
2009
2010
2010
2010
2011
2011
2011
2012
2012
2012
2013
2013
2013
2014
2014
2014
2015
2015
2015
110
Since the end of110
the Bretton Woods system in the early 1970s, the US dollar has
experienced two major episodes of real appreciation, both lasting approximately
100 1980 and 1985 and between 1996 and 2002. Both episodes
five years, between
100
saw periodic interruptions lasting several months. The current episode began
only about 12 months
ago and is unlikely to last as long as the previous cycles,
90
90
as the US recovery in the current cycle is weak by historical standards and the
Fed funds tightening
cycle is likely to be even smaller in scale than currently
80
envisaged by the80Fed. Furthermore, several corporate indicators reveal that the
credit cycle is already well underway.
1979
1979
1979
1982
1982
1982
Real Effective
Effective Exchange
Exchange Rate
Rate (BIS,
(BIS, 100
100 == average
average for
for
Real
Real Effective
Exchange
Rate
the period
period 1994-2015)
1994-2015)
the
(BIS, 100 = average for the period 1994-2015)
2
1973
1973
1973
1976
1976
1976
90
90 since the summer of 2014, the United States' real effective
90
Despite its 14% rise
exchange rate only
80 recently exceeded its long-term average, whether judging by
80
the numbers of the Fed or the BIS. According to estimates by the IMF, a 10%
70
70
increase in the real
effective exchange rate leads to an average reduction in net
60
exports of 1.5% 60
of GDP. At the conference held last August in Jackson Hole,
Fed Vice-Chairman Stanley Fischer indicated that the real appreciation of the
US dollar would have a negative impact on inflation as of the following quarter
Source
Datastream,
Recherche
Amundi
Source ::: Datastream,
Datastream, Recherche
Recherche Amundi
Amundi
and throughout Source
the following year
while its impact on economic activity would
essentially be felt in the second year after the increase occurred. Specifically, he
indicated that the US dollar's rise would hamper growth in 2016 and likely also
Etats-Unis
taux
de change
change réel
réel
effectif
calculédoes
par la
lanot help the US
in 2017. It is evident
that the
appreciation
of the
US calculé
dollar
Etats-Unis
:: taux
de
effectif
par
n°3
Fed economy, the United States is n°3
economy. However, being a relatively closed
likely to
Fed
withstand the pressure. On the other hand, the downward pressure on inflation is
140
140
likely to slow monetary
tightening by the Fed, which could, by extension, constrain
Taux de
de change
change
réelforeign
effectif exchange rate is
Taux
réel
effectif
the rise of the US dollar. Indeed, the appreciation
of the
130of monetary tightening. Several valuation approaches, namely
130
effectively a form
Moyenne de
de long
long terme
terme
Moyenne
those built on behavioural equilibrium exchange rate or purchasing power parity
120
models, indicate120
that the US dollar is already overvalued, and this overvaluation,
which is not yet extreme, could increase further in the coming months.
1973
1973
1973
1976
1976
1976
October 2015
100
100
100
100
Is the US dollar
overvalued?
Weights in
in
the
Fed's
currency
basket
Weights
inthe
theFed's
Fed's
currency
basket
Weights
currency
basket
25
25
20
20
15
15
10
10
Eurozone
Eurozone
Mexico
Mexico
Latam
Latam
Canada
Canada
China
China
EM Asia
Asia
EM
2015
2015
2015
2009
2009
2009
2012
2012
2012
2003
2003
2003
2006
2006
2006
1997
1997
1997
2000
2000
2000
1991
1991
1991
1994
1994
1994
00
1985
1985
1985
1988
1988
1988
2015
2015
2015
2009
2009
2009
2012
2012
2012
2003
2003
2003
2006
2006
2006
1997
1997
1997
2000
2000
2000
1991
1991
1991
1994
1994
1994
1985
1985
1985
1988
1988
1988
1979
1979
1979
1982
1982
1982
1973
1973
1973
1976
1976
1976
The appreciation of the US dollar can mainly be attributed to the divergence of
0
monetary policy 0and to the deterioration of growth prospects in the emerging
countries. The US dollar's current appreciation is unprecedented because
the contribution of the emerging
much stronger—and that of the
zone euro
euro currencies is Canada
Canada
zone
developed currencies much
weaker—than in previous
cycles. Although it has
Japon
Mexique
Japon
Mexique
already risen substantially,
the USD retains someAutres
roomdev.
for G10
further appreciation in
Chine
Autres
dev.
G10
Chine
Latam any additional increase
EM Asie
Asiewill not be very significant
the coming months. However,
Latam
EM
Source
Fed,
Recherche
Amundi
Source
Fed, Recherche
Recherche
Amundi
because it would
risk :::excessive
overvaluation.
Source
Fed,
Amundi
1979
1979
1979
1982
1982
1982
55
55
1973
1973
1973
1976
1976
1976
Conclusion
10
#
01-13
01-13
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03-13
03-13
03-13
05-13
05-13
05-13
07-13
07-13
07-13
09-13
09-13
09-13
11-13
11-13
11-13
01-14
01-14
01-14
03-14
03-14
03-14
05-14
05-14
05-14
07-14
07-14
07-14
09-14
09-14
09-14
11-14
11-14
11-14
01-15
01-15
01-15
03-15
03-15
03-15
05-15
05-15
05-15
07-15
07-15
07-15
09-15
09-15
09-15
55
01-13
01-13
01-13
03-13
03-13
03-13
05-13
05-13
05-13
07-13
07-13
07-13
09-13
09-13
09-13
11-13
11-13
11-13
01-14
01-14
01-14
03-14
03-14
03-14
05-14
05-14
05-14
07-14
07-14
07-14
09-14
09-14
09-14
11-14
11-14
11-14
01-15
01-15
01-15
03-15
03-15
03-15
05-15
05-15
05-15
07-15
07-15
07-15
09-15
09-15
09-15
55
Japan
Japan
Other G10
G10
Other
Source:
Fed,
Amundi
Research
Source: Fed,
Fed, Amundi
Amundi Research
Research
Source:
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