Strong dollar as US yield curve flattens

The severe economic downturn is addressing the issues that for so long were dollar negative, writes Peter Geikie-Cobb and Paul Thursby of Thames River

Figure 1 plots the fortunes of the dollar on a real exchange traded weighted basis over the last 30 years. This can be divided into three distinct periods. From the peak in early 1985 to the first trough in 1995, the dollar was driven by the perils of the twin deficits, both trade and fiscal, as the currency adjusted by falling nearly 50% to rectify the increasing imbalances in the economy. The dollar then rallied by some 40% off that low over the next 10 years as global capital flows were directed towards the US in search of the best returns during the dotcom mania. From the beginning o...