As Rodney explained well, the value of the dollar is completely relative. You can’t say what the value of dollar is actually worth. You can only say what the value of dollar is worth in relation to the value of some other currency.
Earlier this summer, I showed how the value of dollar had increased over the last 12-months against all major currencies, except for the Japanese yen.
Given the recent sell-off, let’s see how the value of dollar has done as investors became increasingly worried about a bearish stock market.
Here’s a table showing currency exchange rates on three different dates: May 14, 2011, Sept 14, 2012, and today. I’ve also calculated the dollar’s increase in value over these two timeframes.
A few interesting things to note…
First, the value of dollar has increased against each of these currencies. This is true if you compare today’s rates against those of about 18 months ago (May 2011) and if you compare today’s rates against the September 14 rates (just before the stock market sell-off began).
The euro lost just 0.7% against the dollar since September 14. That’s a fairly mild drop. Yet, if you look back 18 months, the euro has lost 8.5% against the dollar. This tells me the euro has already been punished more so than many other currencies. It may continue to decline against the dollar, but not as viciously as some other currencies.
The yen, on the other hand, tells the opposite story. It’s only 1.2% weaker than it was 18 months ago. That’s because during the beginning of the euro zone crisis, the yen was still highly regarded as a safe haven currency. It held its value well.
But that changed recently. Since September 14, the yen has lost 5.6% against the U.S. dollar. That drop is bigger than any other major currency. It’s also a big warning sign: Japan is in dire straits. Normally the yen would stay strong in a bearish market. Not anymore.
Watching for shifts in currency trends, like the ones I’ve highlighted in the euro and yen, help me figure out the best way to play the dollar. But no matter how you look at it, expect the U.S. dollar to stay strong for some time.
If you haven’t done so already read the Survive & Prosper issue on “Airplanes and the Purchasing Power of the U.S. dollar.”