Notes From a Fundamental Analysis of the USD

 With regards to the USD as a time series, application of a non-linear measurer directly defines the present situation of the currency. Volatile markets and rising interest rates keep authorities looking for answers; more predictability would aid in solving financial mishaps in the shorter-term. To study the movements of the USD and to forecast future movements, analysts prepare a fundamental analysis of the USD compared to other currencies.

 As a matter of fact, the trade weight, or pegged value of the USD against other currencies establishes the USD's appeal in the global markets. Everything's changing. In a basket of currencies, the USD still stacks up in comparison to the Mexican Peso, Singapore Dollar, and over twenty other currencies. Traders recognize the USD's compatibility in liquid markets; the high frequency of EUR/USD exchange states the currency's outstanding liquidity in the markets.

 Illustrating the tradeability of the USD under current market conditions, a fundamental analysis highlights the USD's performance in the millennium. From continent to continent, the USD impresses investors.

Fixed Exchange Rates

For most import economies, fixed exchange rates peg the value of one currency to another currency to support monetary policy in both economies. The USD counters the Euro, but provides a base currency for trade with the British Pound. Under a fixed regime, the USD delivers liquidity in the global economy. Politics, however, set the limits for the currency.

At the domestic level, one import economy exchanges with another import economy easily. Nothing has to be difficult. Particularly, the USD/CAD exchange functions to aid in deflation; both importers maintain the value of their currencies through the strong support of Gross Domestic Product. However the capital flows, the rate of exchange for 1 USD to 1 CAD situates the currencies among other currencies in a basket. Although the volume of the USD/CAD exchange does not match the frequency of the EUR/USD exchange, the USD/CAD trade occurs to assist the government in implementing economic controls.

Here, interest rates come to light. Before the USD exchanges for the CAD, the Federal Reserve sets the interest rate according to economic factors; the interest rates indirectly affect the fixed exchange rate for the USD. When the authorities establish interest rates for treasury bills and other financial instruments a guarantee from the Federal Reserve covers the life of the bill; although fluctuations occur as time moves along, both variable and fixed interest rates are backed.

In the here and now, the U.S. operates as a small open economy. Considering the size and availability of the USD, authorities implement controls like interest rates to protect the integrity of the currency. 

The Trade Weighted USD

Since Bretton Woods, a broad currency index measures the trade weight of the USD most accurately. Choosing the "broad" measure instead of the "real" numbers allows analysts flexibility in interpreting the value of the USD. Again, constant change in the financial markets render authorities and analysts to a state of unpredictability. It goes that the broad measure reveals a closer picture of current market conditions than a real measure with restrictions that do not reflect the interests of market participants.

According to the trade weighted index for the USD's "Most Frequently Traded With Partners," the USD experienced a down-turn after recovering from the Great Recession. Although business conditions slightly improved, the markets could only progress so much to pull away; still, banks and other financial institutions attempt to comply with regulations while avoiding unnecessary losses. The USD continues to maintain its trade-weight against trading partners.

Covering inflation targets, the USD/CAD and EUR/USD exchanges follow controls implemented by authorities. Normally, the Federal Reserve encourages an inflation target of 2%. But, inflation in the Euro area must also settle. The ECB controls inflation in the Euro area through the use of government interference and other economic controls. Because of the high volume of  EUR/USD exchanges, the ECB stands out as a leading authority in the second decade of the millennium.

Perhaps the USD/CAD exchange helps to redirect capital flows in both import economies. While the USD counters the Euro, it is also easy to say that as a base the currency aids in determining in which direction capital should flow. The USD still holds value as it trades in the markets.

QUESTIONS:

 What are the other small open economies? How does the USD stack up in Gross National Product? 

keywords: fundamental analysis; fixed exchange rate; trade weight

SOURCES:

-Kari Grenade and Winston Moore. "CO-MOVEMENTS BETWEEN FOREIGN AND DOMESTIC INTEREST RATES IN A FIXED EXCHANGE RATE REGIME: THE CASE OF THE ECCU AND THE US". Applied Econometrics and International Development, 2008, vol. 8, issue 1

-ceicdata.com/en/united-states/us-dollar-trade-weighted-index

-researchgate.net/figure/Actual-vs-predicted-EUR-USD-time-series-for-the-PM12-model_fig2_344035215

The Great Recession and the Federal Reserve

From the historical perspective, the collapse of the USD spurred the Great Recession as the Federal Reserve and stock markets faltered against global pressures. The worst happened. A housing crisis and a clumsy attempt to recover intensified the damage when the markets failed. Bank bailouts through Quantitative Easing programs helped the Federal Reserve slow down the wreckage even as global pressures mounted. The "Fed" system, represented by the 12 Reserve Banks looked for more solutions to remedy the economic crisis and stabilize the reserved currency. 

 As things worsened, homeowners could only buckle under the forces and default on mortgages causing an accumulation of more bad debt for the Federal Reserve of the United States to deal with. But, the economy stalled a recovery around 2013 only to come to a full recovery five years later.

 The "Fed" 

According to historians the fate of the USD faltered just as the Lehman Brothers claimed bankruptcy in 2007; the event revealed that there were difficulties which could not be resolved without taking action to file for bankruptcy. The problems erupted. Subprime mortgages took center stage as the major cause of the filing and the conclusive reason for the housing crisis. Because many businesses participated in mortgage-backed securities at the turn of the millennium, the housing crisis had reached several other areas of the financial sector. 

Normal day-to-day business procedures settled balances due with mortgage-backed securities. Businesses such as title and loan companies, car dealerships, etc, followed practices that bent the rules of security exchanges at the cost of the integrity of the USD. Good-faith and the character of business in the U.S. had been compromised. Finally, the mortgage-backed securities that ensured business transactions since the millennium turned into a system of defaults in the housing market.

Not to mention the defaults, interest rates also played a major part in the defunt currency system. As the Federal Reserve looked to guide banks out of the most costly situations, the Libor interest rate continued to rise. Something had to be done. Banks refused to lend to each other as the interest rate climbed to unbelievable highs; this caused a freeze in the the use of the Libor rate. When banks refuted the soundness of the Libor rate by rejecting the use of inter-bank loans, the message that the USD had fallen as the top reserved currency was sent. If banks could not participate in inter-bank loan programs, the "Fed" would be the lender of last resort for banks falling to economic pressures. This was the only way out. 

Furthermore, the bad debt building from the housing crisis presented just one of the causes of the inflation of the USD. The Euro had finally made a move to topple the overly inflated greenback. What surfaced was a decrease in nominal GDP which held the USD under the Euro. A predictable defeat neared the faulty currency system. To tackle the inflated USD, the Federal Reserve would have to lower interest rates or increase the money supply. However, increasing the money supply appeared impossible; the 12 Reserve Banks would have to proceed with caution in favor of lowering interest rates.

The Stock Market Crash of 2008

 Here, the The Stock Market Crash of 2008 sealed the fate of the USD. The Balance reported, "Companies doing business with these banks were negatively affected, and this pummeled their stocks. . . the banking crisis led to a failure of confidence in the U.S. stock market." Businesses could only cut the losses. Monetary policy failed to answer the difficulties faced by banks and now the crash of the markets. Every industry suffered as the crash deteriorated faith in the USD, and small businesses and corporation closed their doors. Factories, restaurants, and shops alike reacted to the crumbling integrity of business in the U.S.

It all happened in a flash when the Dow Jones stock market suffered major one-day point losses and did not correct its losses until 2018. Attempts were made to recover; but, the first success for Dow Jones occurred in 2013, yet could not completely pull the market out of its slump. The true recovery occurred in 2018. Still, the London FTSE also witnessed a 5.3% drop as the crash changed the course of the USD. Then, the other markets followed. 

An interdiscipline approach will be favored by scholars in explaining the causes and aftermath of the Great Recession, but the historical perspective only will thoroughly explain the failure of the USD. Using the historical perspective academics will continue to debate the most significant events of the Recession and the names and faces of the individuals who pulled through for the nation.

The consensus will be that the bank bailouts happened to assuage the effects of pre-existing conditions, not only subprime mortgages. Miscues from the markets also contributed to the defunct. Recollecting the Fed's actions will bring to light the importance of the USD in the first decade. The USD held the reputation as the top reserved currency in the first decade, but definitely faded away as the dawn of a new decade began. 

Questions 

Who are the most important leaders in the Fed who worked to correct the economic crisis? Will there be another financial crisis that lasts longer than the Recession?

keywords: reserved currency; interest rate; stock market

SOURCES:

- Barry Eichengreen. Hall of Mirrors: The Great Depression, the Great Recession, and the Uses-and Misuses-of History. 1 ed Oxford Univer Press NY, 2015.
-Timothy F. Geithner. Stress Test: Reflections on Financial Crises. Random House NY, 2014.
-Scott Sumner. "The Fed and the Great Recession: How Better Monetary Policy Can Avert the Next Crisis"  Foreign Affairs Vol. 95, No. 3 (MAY/JUNE 2016), Council on Foreign Relations
-thebalancemoney.com/stock-market-crash-of-2008-3305535#toc-when-did-the-stock-market-crash-in-2008