At a conference I attended last week, there was a session focused on long-run trends in the value of the U.S. dollar.

It got me thinking: As closely as we watch currency fluctuations on a daily – and even hourly – basis, we don’t often step back to consider dollar trends over many years. So let’s take a look.

dollar index spot

This chart shows the value of the dollar over more than four decades. As you can see, trends tend to last seven or eight years.

The dollar entered the modern era of free-floating exchange rates when we left the Bretton Woods system, which created the IMF and World Bank and established a system of fixed exchange rates with the dollar as the international reserve currency, in 1972.

The dollar pretty immediately entered a period of mild depreciation, where it stayed during the rest of the 1970’s as the U.S. struggled with inflation and oil price shocks.  

That all turned around in the 1980’s when the U.S. Federal Reserve implemented a series of massive interest rate hikes to tame inflation. When the dollar got too strong as a result, it took coordinated central bank effort to tamp it down before it returned to strength in the 1990’s.  

In the early 2000’s we saw a depreciating dollar, as the world recovered from the bursting of the tech bubble. And since the Great Recession, we have seen a gradual strengthening of the dollar. 

Even as we can identify domestic causes, such as economic growth and interest rate differentials, that drive many of these long-term trends, there is another major catalyst as well – and that is global growth.  

What we see is that when the rest of the world’s economies are growing in sync, the dollar tends to decline.

So what’s going on now, in November 2017, and what trends do we expect in 2018? It’s not easy to forecast foreign exchange rates because all sorts of unexpected geopolitical and economic events can derail any 12-month forecast.  

Nevertheless, this is prime budgeting season for many companies and we are not shy about sharing our opinions. We’ll be talking more about that in the coming weeks.

My View: We do seem to be entering an era where global growth appears to be a reasonably solid expectation. In our model, and according to the historical graph, this would put us at the beginning of a mild downward trend in the U.S. dollar that could persist for several years.

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