The slumping dollar has been one of the big tales of 2007. And it’s got some people rather irate. First there was Jim Rogers lambasting Bernanke’s printing press mentality. Now there’s stern words from David Bonderman, co-founder of TPG.
“The US has adopted unbelievably foolish policies,” , he said at a private equity conference in Dubai. “We are heading in the direction where we will get to one dollar equalling one yen.”
Perhaps putting it a touch strongly. But some do believe, despite the growing murmurs that the greenback has reached its nadir, that the dollar has further to fall.
Menzie Chinn, at Econbrowser, (via Naked Capitalism) runs through an (alarmingly complicated) argument that the dollar remains relatively strong.
Standard trade-weighted measures look at changes in exchange rates, from a chosen base date. Chinn instead wants to look at the “levels of exchange rates in real common terms”. He choses the Thomas-Marquez-Fahle index - (which he notes is not an official measure, rather a research effort to look at relative prices in a different way.)
One criticism of the standard measures is that it underweights the prices associated with developing countries, and their growing importance in world trade. The Thomas-Marquez-Fahle paper finds, in contrast to existing measures, a significant increase in US prices relative to its trading partners over the past 15 years - with much of this increase owing to greater trade with developing economies, rather than increases in US prices relative to individual countries.
Chinn’s key point is that the Thomas-Marquez-Fahle approach, in eliminating reliance on trends, tracks what is going on in terms of trade better than the standard Fed trade-weighted measure.
His conclusion is that in 2002 the dollar “was - and remains - relatively strong.”
What this suggests, says Chinn, as that:
there is still substantial dollar adjustment required in order to get the net exports ex-oil to GDP ratio to something around 1% of GDP.
This may be why, he adds, we haven’t seen more global rebalancing - and suggests that this conclusion is not inconsistent with the views of Brad Setser.
Setser himself comments on the post. The dollar may have fallen sufficiently against the euro - but remains too strong against much of the rest of the world, he argues:
I agree with your conclusion that more $ adjustment is needed; the question is against whom does the $ adjust!
