US dollar weakness under the microscope

Why is the US dollar so weak? After all, a similar policy-mix of a tax reform and monetary tightening by the Fed at the beginning of the 1980s led to a 40-percent appreciation of the US currency.

At the onset of the first term in office, the Reagan administration passed the Economic Recovery Act in 1981, through which the top individual income tax rate fell from 70 to 50 percent and businesses were aided with numerous provisions. Thereupon the US economy recovered from the recession and, starting in the first quarter 1983, entered into a solid economic upturn. The acceleration of economic growth was so strong (from negative two percent GDP growth in 1982 to seven percent in 1984) that it led to a fast return of inflation. The Fed didn’t hesitate an immediate answer and raised its policy interest rate between January 1983 and October 1984. This development continued up to the mid-1980s, with a steepening US yield curve and a 40-percent appreciation of the effective US dollar exchange rate.

Download study as PDF (Reading time ca. 10 min)