Dollar's Gyrations Are No Cause for Alarm

FeaturesDow Jones Newswires

If you are tracking the strength of the U.S. dollar, the bill's bipolar behavior may be driving you crazy.

This month alone, it has oscillated, and risen. It finished a pessimistic last among major currencies one day, then rebounded the next.

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But short-term variations in the price of the U.S. dollar or other currencies on the foreign exchange market, where participants can buy, sell, exchange or speculate on different currencies, aren't an indicator of core strength.

"Let's say you have a company like Apple," said Benjamin Jerry Cohen, a professor of international political economy at the University of California, Santa Barbara. "Its stock market price fluctuates from day to day, but it doesn't mean the underlying strength of the company is going up and down from day to day."

It's the same with the dollar.

"To evaluate the strength of a company, you look at its market share," Dr. Cohen said. "You can do the same thing with the dollar. You can look at its market share as an international currency."

An international currency is a national currency that plays a role in global trade, investments and reserves. In addition to the U.S. dollar, those of consequence are the euro, Japanese yen, British pound, Swiss franc, Australian and Canadian dollars and, increasingly, the Chinese yuan, also known as the renminbi.

The currencies' relative strength can be assessed by examining their shares of global bank reserves, foreign exchange transactions and international debt securities.

The U.S. dollar dominates two of the categories and competes with the euro in the third.

About 65% of global bank reserves are held in U.S. dollars, according to data collected by the International Monetary Fund, an organization of 189 countries headquartered in Washington, D.C., that facilitates international trade.

The next closest is the euro, the official currency of the European Union's member states, with about 20% of the share. The Japanese yen and British pound trail at 4% or 5%, and the Chinese yuan has a share of about 1%.

"It has been like that for decades," said Randall Germain, a political economist at Carleton University in Ottawa, Canada. "The dollar is rock solid."

The U.S. dollar is also the primary component of foreign exchange transactions, meaning that, globally, it is the most widely used currency, a second measure of underlying strength.

Because two currencies are involved in each foreign exchange transaction, the sum of the shares totals 200% instead of 100%.

Last year, the U.S. dollar's share was more than 87% of the 200% total, according to data from the Bank for International Settlements, or BIS, an organization of central banks that is based in Switzerland and whose 60 members represent about 95% of world GDP.

The euro was next with 31.4%, followed by the Japanese yen at 21.6%, the British pound at 12.8%, and the Chinese yuan at 4%.

"The dollar is on one side or the other of almost half of all transactions," Dr. Cohen said, "and its share has not significantly changed over a long period of time."

The U.S. dollar and the euro together dominate a third category, international debt securities.

Around 43% of international bonds, notes and money market instruments were issued in U.S. dollars in the first half of 2015, according to the most recent data available from the BIS. Around 39% were issued in euros, 10% in British pounds and 2% in Japanese yen. Figures for the Chinese yuan weren't included.

Among them are the currency speculators who thrive on such fluctuations.

"The various players, especially financial institutions that do short-term trading, they love this," said Robert P. Guttmann, an economics professor at Hofstra University on Long Island in New York. "The worst thing for traders is when the price is stable."

When one currency flags, another revives.

The U.S. dollar's recent weakness, Dr. Guttmann said, is a reversal of the Trump bump that followed the U.S. presidential election based on the expectation that a new agenda of tax cuts, deregulation and infrastructure spending would boost the value of the dollar.

Instead, the euro gained strength.

"They were looking to get killed, and they actually survived and are doing better," Dr. Guttmann said of the European Union and its currency, an effecthe attributed in part to the recent election of Emmanuel Macron as president of France.

The Trump bump, it appears, was replaced by Macron mania -- at least for now.

"In currency markets," Dr. Guttmann said, "what goes up must come down."

(END) Dow Jones Newswires

July 14, 2017 08:14 ET (12:14 GMT)