Wednesday, December 3, 2008

Recession Impact On The U.S. Dollar

So how does the dollar react during a recession? You might be surprised by the consistency of its performance during recessions, but then again this recession is a little different than those of the past. Currency expert Kathy Lien looks at the historical trend and offers some insight in her blog post below.

There has been 3 recessions in the past 30 years. In each of those recessions, the dollar weakened in the first six months of the recession, then gained strength in the next six. Twelve months into the current recession, we see this pattern in the dollar repeated once again.

The more important question however is whether there is a pattern in the way the dollar performs in the second year of a recession. Taking a look at how the dollar traded in 2001, the 1990s and the 1980s, we see no consistent trend but that is only because the 1990 and 2001 recession only lasted 8 months.

The current recession can only be compared to the one in the 1980s and based upon how the dollar performed then, there could be a near term top in the US dollar in the first half of 2009. There were 2 separate recessions in the 1980s and according to the dollar index chart below, in each recession, a sharp dollar rally was followed by a sharp correction.

The space between the purple lines represent the 2 separate recessions. Even though the dollar rally did eventually continue, it was not before a meaningful correction.

I wouldn’t be surprised to see this happen again especially as the strong dollar takes a bite out of corporate earnings in the first or second quarter of 2009.

This article has been reposted from Kathy Lien. The full post can also be viewed on KathyLien.com.

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