How Does the US Dollar Perform in a Recession?

There has been 3 recessions in the past 30 years. In each of those recessions, the dollar weakened in the first six months of the recession, then gained strength in the next six. Twelve months into the current recession, we see this pattern in the dollar repeated once again.

The more important question however is whether there is a pattern in the way the dollar performs in the second year of a recession. Taking a look at how the dollar traded in 2001, the 1990s and the 1980s, we see no consistent trend but that is only because the 1990 and 2001 recession only lasted 8 months.

The current recession can only be compared to the one in the 1980s and based upon how the dollar performed then, there could be a near term top in the US dollar in the first half of 2009. There were 2 separate recessions in the 1980s and according to the dollar index chart below, in each recession, a sharp dollar rally was followed by a sharp correction.

The space between the purple lines represent the 2 separate recessions. Even though the dollar rally did eventually continue, it was not before a meaningful correction.

I wouldn’t be surprised to see this happen again especially as the strong dollar takes a bite out of corporate earnings in the first or second quarter of 2009.

Click on the image to expand it:

Source: Bloomberg

Source: Bloomberg

7 Comments

  1. Dear Kathy, thank you so much for sharing these valuable information via your blog and you had also inspired me to create my own blog on my own daily tradings. And visiting your blog has become my daily breakfast which I cannot start the day without.

    I have learnt so much just from reading your web. Thank you so much.

    Sanada
    Singapore.

    Reply
  2. Well, in hindsight, it is not surprising the USD performs opposite to what most other currencies behave during a recession. It is normal cause and effect for a national currency to fall according to the economic strenths of that country, and that is reflected almost all the time when we observe the patterns globally. But, alas, just as anything is, everything has its economic value, and under the floating mechanism of currencies, currency values begin to have their “commodity” values according to law of supplies and demands of the currencies, besides reflecting on the economic strengths. But ultimately, when we sell something, currency included, we still need to exchange it with another currency. That would mean we exchange with some ‘ safe ‘ currency, which everybody nowadays think is USD / Yen, despite the disastrous showings of the US economy. It seems like we are buying into a mirage! This is a terribly dangerous mechanism of world currencies ! What happen when USD collapses? I don’t think I can even fathom what would happen then !

    That brings to head, would it be better (or worse) if there is a world currency? Another idea for passionate discussion …

    Reply
  3. Firstly, Kathy thanks for such well written and usually astute observations. You must own a very fine crystal ball indeed!

    The US and the greenback has certainly been the bell of the ball since WWII. However, in this age where several economies elsewhere are now big enough to compete with the US, and arguably have an order of magnitude of extra headroom to grow into, the US Dollar would be very vulnerable to sentiment shift.

    I’ve only been trading seriously for 16months but, am astonished at the level of panic demonstrated lately. I feel even the mighty US Dollar is going to experience extreme volatility. Perhaps the good ‘ole days have gone for us. It certainly feels like that here in England.

    Good Luck to the Good…

    Arun.

    Reply
  4. Thanks too to you Kathy for the opportunity here to “talk” on current world economics. I actually speak as a layman in currency, and recent financial events certainly have been stimulating even to laypersons for thoughts. Well, I tend to “feel” that early next year would see a falling of USD vs other major currencies. I was quite pleasantly surprised when I read this article posted today which supports my gut feeling about this. But of course, I am no chart reader to support this feeling. Cheers to all in 2009 trading….time to make some returns !

    http://www.reuters.com/article/reutersEdge/idUSTRE4B36WI20081204

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