The Dollar Bear Awakens

The 2002–2007 period was a major turning point in global currency markets, which triggered the start of a new bear market in the U.S. currency and the  eemergence of a broad strengthening in the euro. The falling value of the dollar brought about a super rally in commodity prices, culminating in new record  highs in precious metals, energy fuels, and agricultural products. This chapter tackles the annual performance of the world’s eight major currencies (U.S. dollar, euro, yen, British pound, Swiss franc, Canadian dollar, Australian dollar, and New Zealand dollar) between 2002 and 2007. As in Chapter 3, the annual performance of each currency is measured by aggregating a currency’s percentage changes against each of the other seven currencies.

The year 2002 marked the end of the U.S. dollar’s seven-year cyclical appreciation from 1995 to 2001 and ushered in the beginning of a bear cycle, entering its seventh year as of this writing in 2008. U.S. manufacturers stepped up their complaints about an overvalued U.S. dollar eroding their competitiveness, demanding that President Bush impose tariffs on U.S. trading partners and declaring that the currency needed to depreciate by about 40 percent.

The president heeded those complaints, and U.S. Treasury officials began adopting a policy of benign neglect, whereby they implicitly wanted the dollar to depreciate, despite mechanically reiterating declarations that a strong dollar is in the interests of the United States, a mantra widely adopted—and fully intended—under the second Clinton administration.

The dollar ceiling was firmly reached in spring 2002 when President Bush launched a trade war, slapping foreign steel producers with tariffs in order to secure the Republican Party victory in key steel and manufacturing states ahead of the Congressional elections later that year. Trade actions, such as tariffs, always beget currency depreciations as countries aim at increasing the competitiveness of their products in the global marketplace.