The Historical Danger Signs of a Strong Dollar

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By Jacob Maslow

Photo of the american and euro banknotesThanks to the European central banks’ quantitative easing economic stimulus policy, the euro has crashed compared to the dollar. The US dollar is completely crushing the Japanese yen and the European euro. It appears that this picture is not going to change anytime soon since there’s talk that the US Federal Reserve’s will be raising interest rates. It’s only a matter of time when interest rates in the United States spike up. Not surprisingly, the dollar has become more attractive, thanks to the possibility of higher deposit rates.

At one level, this might seem like a positive development. After all, the stronger the dollar becomes, the cheaper imports and inputs become for US manufacturers and US businesses. Moreover, consumers can benefit from cheaper goods, which can translate to higher consumer spending, higher consumer confidence, and a more robust US economy. What’s not to love about a strong dollar climate?

Actually, a lot. From a historical perspective, whenever the US dollar spikes up, something truly bad happens. When the strong dollar spikes up, the global economy goes through a convulsion.

The most dramatic example of this is in the early 1970s. The US dollar spiked up and a lot of stock markets, including US stock markets went through stagflation. This is when inflation spiked up while economic growth stagnated. There was a lot of unemployment. Stocks didn’t really go anywhere. It was really a tough time. It was only until President Ronald Reagan when the US got its act together, and stocks started a historic bull run.

Let’s hope that this doesn’t happen again because it resulted in a prolonged stagnation in the equities market. A lot of economists are saying that this is precisely what’s in play. I’m not sure I would completely buy this theory because the big component that’s missing in that picture is skyrocketing oil prices. Thanks to the Arab Oil Embargo in the early 70s, the price of oil just skyrocketed paired with a rising dollar. This isn’t happening. In fact, it’s working in an inverse relationship currently: The price of oil is sinking while the price of the dollar is exploding.

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