I have been investing since 1982 and the movement of the dollar has been an important factor (cause and/or effect) in a number of the important market events that have happened during the 4 decades I’ve been paying attention. The dollar played a significant role in the 1984 Peso crisis, the Japanese stock and real estate bubbles and subsequent collapse (Plaza and Louvre Accords), the US stock market crash of 1987, the S&L crisis of the early 90s, another Peso crisis in 1994, the Asian crisis of 1997-98 which also brought down LTCM, the dot com bubble in the late 90s, the real estate and commodity booms of the early 00s that led directly to the 2008 crisis and the QE world we’ve lived in ever since. Some of those crises were precipitated by a too strong dollar while others were created from a too weak dollar which is why I have said for many years that what we should strive for is not a strong or weak dollar but rather one that is stable. Fixed exchange rates may be too tight a straightjacket but too much volatility also presents some problems.

The volatility of the dollar does present some problems for the world but, for better or worse, it is the world’s reserve currency and I see no real threat to that status on the horizon. We spend a lot of time thinking and writing about the dollar at Alhambra because we think it is the most important price in the world. It affects capital flows around the world which impact global inflation and economic growth and therefore returns in a variety of markets. The trend of the dollar plays an outsized role in our investment process affecting our allocations to stocks, real estate, commodities and bonds. Contrary to popular belief though, its value is not mostly a function of Federal Reserve policy. The dollar’s value is determined by the market, by individuals and companies and countries assessing a wide range of economic policies and conditions globally and making decisions about how to borrow and invest. And while the volatility can be inconvenient at times, we do prefer the market to a small group of politically motivated economists.

One thing we can’t do though is predict the future course of the dollar. I have said this many times and I will keep repeating it because I am constantly asked what we “expect”. For the record I expect nothing and after nearly 40 years of this am surprised by little. We are not in the business of predicting the future. Economists are still infected today with what Hayek in his Nobel acceptance speech called the “pretense of knowledge”. Economics is not a hard science and there is no way to “acquire the full knowledge which would make mastery of the events possible” as socialists throughout history have discovered repeatedly. And yet, economists continue to believe that, while the socialists have failed, they will succeed in essentially the same task, predicting future economic statistics to hundredths of a percent.

With no ability to predict the future, we must wait for the dollar to reveal its course and react accordingly. Dollar trends have, in the past, been fairly persistent and long lasting. Since the mid-90s there have been three distinct periods with a strong dollar from 1995-2001, a weak dollar from 2002-2008 and a strong dollar until 2017. Since 2017 the dollar index has traded in a narrow range of about 10%; trends within that range have been choppy and fairly short lived. There are other ways to measure the value of the dollar – versus gold for instance – and we certainly take those into account but it is the value relative to the other alternatives that has the biggest impact on asset prices and our portfolios.