Is it better to have a strong dollar or a weak dollar?
If you are a well-off retiree who enjoys spending the income produced by your bond portfolio on regular trips abroad, you likely want a strong dollar that keeps its purchasing power relative to other currencies. If, however, you make a living by selling apartments in Miami to a largely foreign buyer base, you probably do not mind when the dollar loses ground to foreign currencies.
If the dollar weakens vis a vis the euro or the Brazilian real for example, Miami real estate becomes cheaper to potential buyers whose assets and earnings are based in those currencies. Indeed, currency movements and foreign buyers helped Miami avoid the worst of the real estate debacle nine years ago. By attracting or dissuading foreign capital and commerce, exchange rate movements can be a valuable amplification mechanism for the monetary policy a country’s central bank employs to manage the economy.
When, for the sake of exchange rate stability, a country ties its currency to a foreign currency, it cedes some of its policymaking autonomy and restricts its ability to respond to domestic economic challenges. The tug-of-war between currency stability and policymaking agility has existed throughout history and is currently on display in the eurozone.
In the late 20th century, leaders from 11 European countries agreed to unify their currencies in a bold initiative that they felt would foster economic integration, prosperity and peace on the continent. Eight more countries joined the currency union in subsequent years. While this unification of currencies simplified a latticework of exchange rates and removed the uncertainty of how these rates would move against one another, the economic trajectories of numerous eurozone nations during the past 15 years have once again revealed the downside of currency ties.
Citizens of various “peripheral” countries, which are now unable to conduct independent monetary policies, have seen their economies whipsaw around a sub-optimal interest rate, first overborrowing and then suffering banking crises. As economist Joseph Stiglitz highlights in his recent book on the euro, the pernicious effects of this inflexibility have been compounded by distinctive characteristics of European institutions, including the design of its central bank.
Whereas the United States Federal Reserve is obligated by its charter to promote price stability and full employment, the European Central Bank is only mandated to promote price stability. High unemployment rates in some eurozone countries do not carry as much weight in the bank’s decision making as they would under a “dual mandate” arrangement. Over the past decade, persistently high unemployment has directly fed the rise of new, populist political parties throughout Europe, calling the future of European integration into question.
Populism has emerged in response to similar situations in the past.
Fifteen years ago, an unsustainable peg of the Argentine peso to the dollar collapsed in a crisis that made way for more than a decade of Kirchnerism.
And over a century ago, populist politician and eventual Brickell Avenue resident William Jennings Bryan inveighed against the gold standard that underpinned the U.S. and British currency tie. Speaking to a nation in its third year of recession and a constituency of farmers devastated by their debts, Bryan famously pleaded not to crucify mankind on a cross of gold. Bryan proved unsuccessful in three presidential bids, and populists of a different sort have come up short recently in Europe, most notably in France.
This would appear to have removed the existential threat to the euro for now, but the often tense interplay of currencies, policies and politics will undoubtedly persist for generations to come.
Ken Anderson is the chief operating officer of Unimar Financial Services. He is a CFA charterholder and former CFA Society Miami president. firstname.lastname@example.org.