The Dollar - 1980s vs. Now
Asha Bangalore
The plunging dollar is in the limelight once again. Today, the dollar hit a low of $1.26 vs. the euro, the lowest reading since February. For the most part, the dollar has traded upward of $1.20 vs. the euro in 2004.
Chart 1
In trade weighted terms, the dollar closed at 84.41 vs. major currencies on October 19. The sharp decline of the greenback since early-2002 takes us back to the latter half of the 1980s.
Chart 2
The large current account deficit is the important aspect that the current period and the 1980s have in common. In the second quarter, the current account deficit was 5.71% of nominal GDP, a new record. The largest previous current account shortfall in the 1980s was in the fourth quarter of 1986 when the current account deficit was at 3.45% of nominal GDP.
Chart 3
Looking back, the trade weighted dollar hit a high of 143.63 in March of 1985 prior to the Plaza Agreement in September 1985 when the G-5 (U.S., U.K., West Germany, Japan, and France) intervened to bring down the dollar. The significant decline in the value of the dollar in subsequent months to a low of 97.01 by January 1987 led to the Louvre Accord in February 1987 to stop the continued depreciation of the dollar. The dollar hit a low of 85.45 on April 1, 1988 before regaining an upward trend. The dollar traded between 143.63 and 85.45 during March 1985 - April 1988. This amounts to a 40.5% depreciation before the green back stabilized. As mentioned earlier, the current account deficit (-3.45%) hit a record high mark in the fourth quarter of 1986 and shrunk to 2.28% of nominal GDP only by the second quarter of 1988.
Returning to the current period, the traded weighted dollar's recent high at 112.87 was on January 28, 2002 (see chart 2). As of October 19, it was quoted at 84.41, down 25.21% from this peak. The record current account deficit in the second quarter of 2004 is expected to be replaced by a new record in the third quarter. If history is any guide, the descent of the dollar is most likely to continue until the current account deficit shows a meaningful decline.
Asha Bangalore (agb3@ntrs.com)
October 20, 2004
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