Hale Stewart

About the Author Hale Stewart

Hale Stewart spent 5 years as a bond broker in the late 1990s before returning to law school in the early 2000s. He is currently a tax lawyer in Houston, Texas. He has an LLM from the Thomas Jefferson School of Law in domestic and international taxation where he graduated Magna Cum Laude and is also a Chartered Asset Manager, Chartered Wealth Manager and Chartered Trust and Estate Planner from the American Academy of Financial Management. He is the author of the book US Captive Insurance Law. You can read him daily at the Bonddad blog (www.bonddad.blogspot.com).

The Strong U.S. Dollar And Recessions


In the past, has a sudden move towards a strong dollar been associated with recessions? With some qualifications, the answer is “yes.”

Let’s start with a few graphs from XE’s currency section. First, here is the Japanese yen vs. the U.S. dollar:

The yen fell by over 10%, before stabilizing late in the 4th quarter of 2014.

Next, here is the euro versus the U.S. dollar:

As I have been reporting weekly since February, steel production and rail shipments have turned negative YoY. Steel production has averaged a decline of about 10% YoY recently, and rail carloads have also turned negative YoY, with coal shipments leading the way, also down about 10% YoY. First-quarter GDP was just reported as barely positive, and the unexpectedly large trade deficit in March has some revising that number into negative territory.

So I thought I would turn to the historical data. In the past, have recessions been associated with big positive moves in the U.S. dollar? Below is a graph of the trade-weighted U.S. dollar (blue) YoY, compared with the YoY% change in real GDP (inverted, amplified scale for easier comparison, red). First, here is 1974 to 1995:

Now, here is 1995 to the present:

Further, there were strong positive moves in the U.S. dollar in 1984, 1997, and 2005, none of which were accompanied by recessions.

So, while a strong dollar has sometimes been associated with a recession, this is no better a relationship than I would expect to find by chance.

Writing that he believes the period of poor data is abating, Scott Grannis states that, “Crude oil prices also tend to move inversely with the dollar,” accompanied by this graph:

Certainly that appears true since about 2002, but what about over the longer term. Specifically in 1986, and to a lesser extent in 2006, there were big declines in gas prices. Let’s give each of those periods a closer look.

First, here is the 1980s, adding the YoY% change in oil prices (green, muted better to show change):

… and here are the 2000s:

In neither 1986 nor 2006 did the U.S. dollar appreciate. In fact, during both periods, it was declining – strongly in 1986, and slightly in 2006. So it isn’t the big decline in gas prices that had the dollar rallying so much in 2014.

Here’s the explanation for the U.S. dollar’s move 6 months ago from Mohammed el-Erian:

“Two major factors are currently working in the dollar’s favour, particularly compared to the euro and the yen. First, the United States is consistently outperforming Europe and Japan in terms of economic growth and dynamism – and will likely continue to do so – owing not only to its economic flexibility and entrepreneurial energy, but also to its more decisive policy action since the start of the global financial crisis.

Second, after a period of alignment, the monetary policies of these three large and systemically important economies are diverging, taking the world economy from a multi-speed trajectory to a multi-track one. Indeed, whereas the US Federal Reserve terminated its large-scale securities purchases, known as “quantitative easing” (QE), last month, the Bank of Japan and the European Central Bank recently announced the expansion of their monetary-stimulus programs. In fact, ECB President Mario Draghi signalled a willingness to expand his institution’s balance sheet by a massive €1 trillion ($1.25 trillion).”

This, of course, begs the question: If it was strong U.S. economic growth that led to the strengthening dollar, shouldn’t the sudden deceleration of the U.S. economy into near-recession cause the dollar to weaken? Unless the rest of the globe is already in recession, meaning the U.S. is still the proverbial “least dirty shirt,” then the relative change in the U.S.’s economic strength should cause a rebalancing. So it is of at least some concern that, according to Recession ALERT, the globe as a whole entered a recession in February.

The euro fell by over 20% compared with the U.S. dollar, and continued to fall into the 1st quarter of 2015.The sudden strengthening of the U.S. dollar has been associated with the 1982 and 2001 recessions. On the other hand, before the 1991 recession, the currency weakened substantially. In 1980, it moved quickly from weakening to stable, and it also weakened substantially during the first part of the Great Recession, reversing course and strengthening in the second, deeper half of that recession.