Partial Stories

Krugman and Ritholtz say the “conservatives” should not be hysterical about the dollar decline. That´s true, but Krugman doesn´t miss the chance to point out that the “dollar debasement” was not the work of Obama. Guess who´s behind it?

The figure below shows the whole history of the dollar trade weighted exchange rate against a broad basket of currencies since the flexible rate system began in 1973, both in nominal and real terms. Up to the mid 1990´s the dollar appreciated almost continuously in nominal terms. That´s because until that point in time many important emerging market trade partners had high inflation (and devalued accordingly). Since then, with inflation low almost everywhere, the nominal and real exchange rates move in tandem.

Notice the long cyclical swings in the real rate, which have nothing to do with specific presidents or political parties. Maybe now the real exchange rate will break through the long standing “support level” of something close to 80. But who knows?

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