Here’s the USD Index from 1991 to 1995. All values multiplied by 100x to eliminate decimals.
Throughout this period, the 10 year Treasury yield and 10 year German government bond yield were almost the same for most of the time. These 2 yields moved in tandem. Hence, interest rate differentials were nonexistent.
Here’s the U.S. Treasury 10 year yield.
Here’s the German 10 year government yield.
The USD’s exact bottom in 1992
The USD Index bottomed a few days before George Soros “broke the Bank of England” on September 16, 1992.
After the Pound crashed out of the ERM, multiple European currencies had to be devalued relative to the German Mark (and thus to the USD). Hence the USD Index went up.
- The British government withdrew from the Exchange Rate Mechanism (ERM).
- The Italian lira had fallen 7% in September and was temporarily suspended from the ERM.
- The SPanish peseta and Portugese escudo both fell 6% in October.
- Denmark rejected the Maastricht Treaty on June 2, which was to intended to create a common economic and monetary union in Europe (EU).
- France held a referendum on the Maastricht Treaty on September 20, 1992. The Treaty was approved by only 51% of voters.
- Hence, there was a lot of political and currency uncertainty in Europe. After the French referendum, issues regarding EU integration were regarded with much more skepticism than before.
That’s why the U.S. Dollar bottomed in September 1992. However, the U.S. Dollar did not enter into a new bull market. There was no widespread recession in Europe. Money Flow to and from the U.S. was neutral, so the USD Index bounced around in a range.
Why the U.S. Dollar fell from January 1994 to mid-1995
The U.S. Dollar Index fell because of Money Flow.
- U.S. President Bush, Canadian Prime Minister Mulroney, and Mexican President Salinas signed NAFTA on December 12, 1992.
- Over the next year, NAFTA was ratified through each of these countries’ legislative branch.
- NAFTA came into effect on January 1, 1994. NAFTA immediately eliminated tariffs on more than 50% of Mexico’s exports to the U.S.
The U.S. dollar started to fall as soon as NAFTA was ratified. Money Flow went into Canada and Mexico to built plants/factories. The USD Index fell 17.7.