By one measure, the greenback’s rally has eclipsed the level achieved at the height of the dotcom bubble two decades ago.
The fixation of markets on the outlook for inflation has helped mask other multi-decade moves in market pricing, most notably the persistent strength in the US dollar.
Crucially, the information contained in exchange rates provides a different lens to that available from cash rates and bond yields. Whereas bond yields embody a set of expectations about the absolute level and timing of cash rates for a single country, exchange rates embody this same information but as a relative difference between two countries.
On a bilateral basis, the US dollar is already at multi-decade highs. Whether against the yen or the euro, the dollar hasn’t been this strong since the heady days of the US tech bubble in the early 2000s.These bilateral measures, however, overlook the trade and investment flows between the dollar and many other trading partners. They also don’t account for changes in trade patterns over time – the US trades a lot more with China now than it did in previous decades.
When we look at the US dollar on a real effective basis, the true extent of the dollar’s super cycle becomes apparent. In real effective terms, the peak that is building in the greenback has already moved well above tech bubble levels. The foothill suggested by bilateral exchange rates transforms to a mountain when viewed in real effective terms.