For a safe-haven currency, the dollar has been a bit of an iffy refuge for investors this year. Recent fears of Western military intervention in Syria and longer-standing concerns about the U.S. Federal Reserve starting to withdraw its stimulus have hammered emerging-market currencies. India’s rupee, Brazil’s real, Turkey’s lira, South Africa’s Rand and Indonesia’s rupiah are among those that have seen double-digit drops against the dollar this year. Yet the greenback has not risen anything like as much as might have been expected against other currencies as a whole. As the chart above shows, the Dollar Index, which measures the value of the U.S. currency against a basket of currencies, is up by less than 4% since the start of this year.
It is down 3% from a peak in July — and therein lies the primary clue to its relatively lackluster performance. In response to the U.S. Fed’s fuzzy signals from May onwards about when it would start winding down its asset-purchase program, investors have been unloading U.S. government debt, with the sell-off becoming widespread in July. Since then, emerging markets’ central banks have been using their dollar reserves to prop up beleaguered currencies, exerting additional downward pressure on the dollar.
For now, signs of economic recovery in Europe have also strengthened the euro and sterling against the dollar, though this will likely prove temporary. In the medium-to-long term, the U.S.’s relatively faster rate of economic growth should mean that the dollar will strengthen against the currencies of the developed economies — particularly if monetary policy in the U.S. continues to diverge from that in Europe and Japan. Yet as the chart below of the Dollar Index from 1973 to date shows, the dollar still has a ways to go to recover its former might.