V.8:3 (91-95): Moving the dollar by Eric Sharp

Moving the dollar by Eric Sharp

There's no doubt about it. The U.S. dollar isn't just an important trading vehicle in itself, but its price changes have major effects that ripple into many other markets. In essence, it's a "dog" with a tail that wags prominently into the bond, stock and gold markets. The dollar also is a rather misunderstood phenomenon.

From the end of World War II until the early 1970s, the dollar was tied to other major currencies by fixed exchange rate agreements. After it became free-floating, the dollar went through some major ups and downs. Most striking of all is the roller-coaster ride it took during the Reagan years, doubling in value and then plummeting almost to where it started. In early 1988, the dollar index may have formed a bottom. Just from broad relationships, it seems possible that it's in the early part of another major bull market. That makes it all the more interesting to know the factors and relationships behind changes in the dollar's value.

Talk to 10 economists about what influences the dollar, and you'll get 10 different ideas. However, you will hear such things as trade deficits, interest rates, investment flows and inflation creeping into the discussion repeatedly.