China's Currency

We have been having so much fun lately talking about trade wars and Trump's taxes, I thought we might get back to data graphs and mundane topics like exchange rates. Some of you have been getting less than required sleep lately so I hope this helps.

Below is a graph my friend Fred (at the St. Louis Fed, https://fred.stlouisfed.org/ ) helped me create. It has data on two key exchange rates -- the dollar/yuan and the dollar/euro rates. The data goes from January 2005 to March 2019. The data are monthly so you see 14 years of monthly data points.

Why do we bother with exchange rates in a macro blog? Was it because someone had a little too much JD? Perhaps. But we love to talk about exchange rates for several reasons. First, whenever the dollar appreciates against another currency, that means the currency of the other country gets weaker and foreigners would want to buy fewer US goods (assuming prices didn't change in the meantime). It also means that Americans or people holding dollars will find the goods and services we buy from other countries are less expensive. This improves the inflation rate in the US and tilts spending away from America. Knowing whether the dollar value is going up or down, therefore, helps us know more about changes in the inflation and growth rate in the USA.

I could write a book on exchange rates but I see some of you have already fallen asleep. The good news is that Davidson, Von Hagen, and Hauskrecht (Macro for Business: The Manager's Way of Understanding the Global Economy, Cambridge University Press) will be out in the bookstores in January 2020. So you will have lots of pages you can read soon.

Let's dispense with why exchange rates are important and look at what the graph might be telling us.The first thing to know about the chart is that each data point shows the percentage change in the exchange rate changed over the past year in each month. The second point is that a movement upward on the graph implies an appreciation in the value of the Chinese yuan or the euro (and therefore a depreciation of the dollar.)

We can see some years that showed significant dollar depreciation -- 2007-08, 2011, 2013,  and 2017.

Of course, you also see that the values of these currencies are highly variable. Lots of peaks and valleys. That disputes a widely held notion that the Chinese peg their currency against the dollar -- always keeping it depreciated against the dollar. The common hills and valleys shared by the euro and yuan (against the dollar) dispute any special activity by the Chinese on their currency since 2005. If anything, the yuan has the greater variance of the two.

We can see a distinct period of dollar appreciation from the end of 2013 through early 2017. Since then, the dollar has been highly volatile falling and then rising again.

Of course, you could take a longer view and note that since its trough in 2008, the dollar has been on an upward climb at least through 2017. The hump in 2018 interrupts the trend toward a higher dollar but one wonders if the trend will soon reappear.

Clearly, this little picture helps us to see why inflation has been so tame in the US economy.  And it might show why, if it continues, the US could be in for a period of slower economic growth.

I checked with other exchange rates and the truth is, the dollar has generally risen against most currencies. So much for the China story. The US dollar has been rising for global reasons, and China has had very little to do with that. Perhaps it is a testament to the strength of the US economy relative to other countries after we all escaped the worst economic cycle since the Great Depression.