No single approach to the dollar works all the time. But the most important is interest rate spreads.

The reason the dollar appreciated so much in the early 1980s is that interest rate spreads exploded upward to attract the foreign capital needed to finance the structural federal defictit created by the Reagan tax cuts. Int he early 1980’s “crowding out” worked through the dollar to crowd out the manufacturing and other sectors sensitive to the dollar rather then the interest rate sensitive sectors. Later after a new structure of large foreign capital inflows to the US economy been established as the new norm the currency moves did not have to be as large as they had been in the early 1980s. But interest rate spreads were still the dominant factor driving the exchange rate.

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