The US dollar: Another bubble?
25 April 2001
Back in 1995, just before the start of the great bull market of the late 1990s for US stocks, and quite a bit before the internet-mania that was the high point of the former, one US dollar bought as little as 81 yen. At about the same time, that same US dollar bought 1.39 Singapore dollars.
Approximately six years later, one US dollar is buying 122 yen and 1.81 Singapore dollars. That's a rise of about 50 percent against the yen and 30 percent against the Singapore currency. That's a formidable performance. It's made to appear even more formidable when you realise that in 1995, the US trade deficit averaged US$8 billion a month, while in January 2001, the trade deficit exceeded US$33 billion. In other words, the US dollar surged up spectacularly when the trade performance was deteriorating in an equally spectacular manner.
The reasons for this apparent contradiction are, of course, well known. They include the strong US economy, the bull market in stocks and the financial turmoil in emerging markets in 1997 and 1998. But the first condition is now dissipating rapidly, the second is gone and the third is currently much less severe. And yet, the US dollar remains strong, rising against most Asian currencies so far in 2001.
Clearly, there are incorrigible US-dollar bulls out there. But we've seen this sort of thing elsewhere before, and not too long ago. Remember the internet bubble? We've all seen how overvalued internet stocks in 1999 went even higher in early 2000. If overvalued stocks can continue to go still higher, why not overvalued currencies?
It's not as though there are no detractors of the US dollar, however. On 19 April 2001, The Business Times published a Bloomberg report warning of a bubble in the US currency. The Business Times published its own report on 25 April 2001 warning that the traditional refuge status of the US dollar may not be enough to counteract continued reductions in US interest rates. This marks a turnaround on The Business Times's own bullish stance on the currency earlier in the year -- ironically, only a few days after the US Commerce Department reported that the US trade deficit for February 2001 shrank to US$27 billion, the smallest since December 1999.
The Business Times may be slightly behind the curve. However, you can be sure that there are many others further behind.
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