It’s no longer the cleanest, dirty shirt.
Wolf Richter on Wolf Street.
The US dollar has dipped against the euro, with the exchange rate now at US$1.16 for 1 euro. This marks the dollar’s lowest point against the euro since November of 2021.
Back in early January, there were discussions about the euro depreciating against the dollar for three consecutive months, even dropping below parity. That didn’t play out as expected. The euro did hit $1.02, then rebounded and has been on an upward trend since.
Long-term, the EUR/USD exchange rate has landed back in the middle of its typical range. The European Central Bank is taking steps in the right direction, ramping up its quantitative tightening this year by reducing three trillion euros worth of QE bonds and loans.
The dollar and euro are historically volatile compared to each other. In the early 2000s, especially, the euro’s stability was a constant challenge. Yet by 2005, the US financial system was beginning to fracture, eventually leading to the full-blown crisis of 2008.
Subsequently, the eurozone faced its own crisis, leading to a steep decline in the euro against the dollar amid central bank maneuvers. So, it seems, it’s always either one crisis or another—or sometimes no crisis at all—and currencies react dramatically.
The latter half of 2023 was a time when Americans could snag good deals in the eurozone, as the euro dipped below parity (highlighted in the chart below).
Now, however, it’s a little less favorable. Currently, something priced at 1 euro costs about $1.16, which means the dollar has lost around 18% against the euro since September 2021.
The Japanese yen has been quite a rollercoaster, collapsing about 50% against the US dollar from 2012 to mid-2024. This involved some rapid drops, as well as slower declines, with varying degrees of recovery in between. The yen was around 80 to the dollar in 2012.
Thanks to significant intervention by the Japanese government in the last two years, the yen’s freefall has somewhat stabilized and even reversed. The Bank of Japan has adjusted rates and introduced QT recently, which seems to have bolstered the yen.
Right now, the dollar is trading at about 145 yen after a considerable drop prior to 2022.
As for the Canadian dollar, it hit a low of 69 cents against the USD in early January but has seen a slight recovery. Still, it remains low due to Canadian authorities purposely keeping a competitive edge for exports to the US, particularly against Mexico.
At the moment, it’s trading at 72.8 US cents, indicating only a modest improvement against the dollar.
While the DXY Dollar Index is influenced mainly by the euro and yen, it also tracks the British pound, Canadian dollar, Swedish krona, and Swiss franc. Despite Canada being a major trade partner for the US, the significance of the other three currencies is less pronounced. Notably absent from the DXY are currencies from key trade partners like China, Mexico, South Korea, and Taiwan.
Currently, the DXY stands at 98.0, a notable drop from 110 in January 2025 and 115 in October 2022. This marks its lowest point since April 2022.
The DXY was set to 100 in 1973, when these statistics were first recorded, positioning today’s rate near that historical benchmark. However, since then, some currencies in the basket have been replaced by the euro, and trade dynamics have shifted—particularly the US’s import reliance that has moved more towards China and Mexico over the years.
When soft currency is included in the basket…
The WSJ dollar index provides a broader view, covering six of the currencies in the DXY, and several others including the Chinese yuan, Mexican peso, South Korean won, new Taiwanese dollar, and Indian rupee. Each currency in this basket is weighed by its share of global forex trading, meaning some currencies are in a pretty tough spot right now, particularly the Indian rupee.
The Indian rupee has seen about a 47% decline from its rate in 2010, hovering around 1.16 US cents. It’s underperformed significantly, though this is fairly standard for currencies of developing economies.
The WSJ Dollar Index has slipped roughly 8% this year, moving from 103 down to 94.9 due to its diverse currency basket, including those from major trading partners. That 103 level was quite significant, as the index has rarely topped 100 since it was established in June 2001.
Since 2022, the WSJ Dollar Index has fallen multiple times to around 95, only to bounce back again.
