Hyun Song Shin Explains Why This Dollar Shock Is So Unique

Tracy Alloway (0:10)

Hello, and welcome to another episode of the Odd Lots Podcast. I'm Tracy Alloway.

Joe Weisenthal (0:14)

And I'm Joe Weisenthal.

Tracy Alloway (0:16)

Joe, have you looked at a chart of the dollar recently?

Joe Weisenthal (0:20)

It's the only chart I look at. Well, let's put-

Tracy Alloway (0:22)

Well, if you were gonna choose one desert island chart right now, the dollar is a pretty good candidate.

Joe Weisenthal (0:27)

Yeah, that's right. I'm only sort of half joking when I say it's the only chart that I look at, because so many, you know, the strong dollar has become the sort of like central market story right now. And then everything else sort of like trades off of is the dollar weak or strong? I think we went a couple of days where you're like paying attention to the British pound, but now that kind of seems to be over. No, it's really all about the dollar. And it's coming off a little bit from its highs, but it's still very high.

Tracy Alloway (0:54)

Yeah, I was gonna say, you know, the last time we had an episode specifically devoted to the dollar, I think it was in the summer, and we were kind of joking about top-ticking it.

Joe Weisenthal (1:03)

Yeah, we didn't though.

Tracy Alloway (1:04)

We definitely didn't, because it just kept going. And I think it reached a record high in September, and now, as you mentioned, it's come down a little bit, but still incredibly strong, and it's having a massive impact on not only markets, but real economies around the world.

Joe Weisenthal (1:19)

Right, that really is the key thing. And you know, it's a theme that we've talked about for years, even before the pandemic, or even during periods when the dollar is kind of weak, or much lower than it is, dollar cycles are really important, both for markets and the real economy.

Tracy Alloway (1:35)

Yeah, and even though people write quite a bit about them, I feel like they still don't get enough attention paid to them, weirdly. It's like one of those things that, I don't know, people talk a lot about them, but we should definitely talk even more.

Joe Weisenthal (1:47)

And when people, or at least you and I, but when people think about these dollar cycles and the effect they have globally, I feel like there's always one name that comes up first.

Tracy Alloway (1:56)

Yes, so on that note, we really do have the perfect guest to discuss this. Someone who's been on the podcast before talking about what the strong dollar means for the global economy, someone who's done a lot of academic research on this topic. And to this day, whenever you and I write about a strong dollar, we always make sure to reference his previous papers. So I'm very pleased to say we are going to be speaking with Hyun-Song Shin. He is, of course, the economic advisor and head of research at the Bank for International Settlements. And the BIS has just published a bulletin all about the FX market with a big portion of it devoted to what's going on with the US currency. So really the perfect person.

Joe Weisenthal (2:37)

Let's do it.

Tracy Alloway (2:37)

All right, Hyun, thank you so much for coming back on Odd Lots.

Hyun Song Shin (2:41)

Thanks, Tracy. Thanks for inviting me back.

Tracy Alloway (2:43)

So I mentioned in our intro the chart of the dollar looks like, if you look at the Bloomberg dollar index, for instance, it seems to be at a record. Can you maybe give us some context about what we're seeing with the US currency now? How unusual is this particular moment in history?

And, you know, Joe mentioned that there have been strong dollar cycles previously. How is this one similar or different?

Hyun Song Shin (3:10)

Yeah, Tracy, that's a great question to kick off with.

You know, maybe I can go back in time a bit and give you the broad sweep here. I mean, if we look back to the past 50 years or so, maybe even the past 40 years, the era of floating exchange rates, the chart for the dollar looks a bit like a W. You know, we have a peak in the early 80s. In fact, it peaked in January of 1985 And then it peaked again in the early 2000s.

And I'll give you some numbers shortly. And it's very high currently. So just to give you some magnitude, I think it's worth having some of these numbers in our minds as we talk about this. The BIS publishes a long series on exchange rates. It's the BIS series on real effective exchange rate. So it's a weighted average across all the major bilateral exchange rates with respect to a particular currency. And then we adjust for inflation, relative inflation as well. If we go back 50 years and just look at the average of the real effective exchange rate for the dollar, the average is around, it's just over 110