Why the U.S. dollar was in a bull market from 1980 to 1985
The U.S. dollar was in a historic bull market from 1980 to early-1985. Here’s the U.S. Dollar Index (all values multiplied by 100x to eliminate decimals).
Money Flow ultimately determines the U.S. dollar’s bull and bear markets.
- When money isn’t decisively flowing in one country’s direction, the USD Index swings sideways in a massive range.
- When money is decisively flowing towards the U.S., the USD is in a big bull market.
- When money is decisively flowing out of the U.S. to a major foreign economic power, the USD is in a bear market.
Money Flow is impacted by many factors:
- Interest rate differentials
- Differences in economic conditions
- Differences in economic opportunities
- Differences in political safety.
- Inflation (click here to see how inflation impacts the U.S. Dollar).
Various stages of this USD bull market were driven by different money flow factors.
1980 – April 1982
From 1978 to early-1980, the Fed hiked interest rates at the same pace as inflation. Hence, real interest rates did not skyrocket and the U.S. dollar was basically flat.
Here’s the year-over-year inflation rate.
Here’s the 10 year Treasury yield.
But when inflation cooled down after early-1980, Fed Chairman Paul Volcker continued to hike interest rates to kill inflation once and for all. (Inflation haunted the U.S. in the 1970s. Volcker wanted to slay this beast, no matter the cost to the economy).
Thus began the U.S. dollar’s bull market in 1981. Money Flow came into the U.S. from Europe:
- U.S. real interest rates were rising (U.S. nominal interest rates were elevated while inflation was falling).
- U.S. Treasury yields were much higher than those in Europe. Here’s a chart for the German 10 year government yield.
Contrary to popular thinking, interest rate differentials are rarely the driver behind Money Flow. Interest rate differentials only impact Money Flow when the differences in interest rates are HUGE. And the differences between U.S. vs. foreign interest rates were indeed huge during 1980-1982 (around 5%).
1982 to early-1985
In the fall of 1982, Fed chairman Volcker started to lower interest rates because he was satisfied with the massive decline in inflation.
The U.S. dollar Index was flat from late-1982 to early-1983 because there was no clear direction in Money Flow. The old “interest rate differentials” bullish theme was gone.
But by 1983, a new bullish theme for the U.S. Dollar appeared. It was the Reagan Era’s economic boom. The U.S. economy saw a long expansion in the 1980s, but the boom was strongest from 1983 to 1985. Meanwhile, other major economies like Japan and Germany had yet to experience an economic boom like that of the U.S.. It was a go-go time in the U.S. only, and Money Flow from around the world poured decisively into the U.S. to take advantage of economic opportunities. Here’s a newspaper snippet from that era:
The uncanny euphoria and optimism generated by the Reagan reelection campaign helped keep the dollar strong. Foreign investors were infected by the mood, and they continued to plow their cash into the U.S. economy. The American Treasury encouraged the inflow by offering a series of Treasury notes on the Euro bond market. The dollar even continued to defy the experts’ predictions when, after the election, the almost-predictable hangover set in.
In 1984, the U.S. dollar partially went up on fears of protectionism (similar to the U.S. dollar’s surge after Trump’s election in late-2016). Various industries were lobbying Congress for protectionist policies (tariffs on foreign goods). This clamor had a completely unintended side effect.
Manufacturers and industries wanted protectionist policies because the U.S. dollar was too strong. Fears of protectionism caused the U.S. dollar to rise even more. The rising U.S. dollar became a self-fulfilling cycle.
*According to economic theory, tariffs make imports more expensive for consumers. To offset that increase in price, the U.S. dollar’s relative value to foreign currencies must rise.
Click here to read why the U.S. dollar’s bull market ended in early-1985.