Spend some time in the hotels, restaurants and even newsstands of Western Europe these days, and as an American you understand pretty quickly that you’re poorer than you once were. To be precise, you’re 40% poorer–to go by the dollar-euro exchange rate–than you were six years ago.
It’s harder to understand why this should be. Currencies rise and fall over time because countries really do get richer and poorer. Dig something valuable up from under the ground, or devise products or services that people value, and your money will be worth more. Let your industries fall behind, or allow inflation to debase the value of your money, and its global standing will decline.
The puzzle is that there’s no real evidence that the economic prospects of Western Europe have suddenly improved 40% compared with the U.S. This makes it tempting to assign the dollar’s drop to the customary moodiness of currency markets, in which traders make guesses about the future and inevitably get things wrong for years on end.
There may be something more significant afoot this time, though. It has little to do with the economies of Europe (or of Canada, Australia or New Zealand, whose dollars have made big gains against the U.S. version). Instead, the real action involves the countries whose currencies haven’t gained on the dollar despite dramatically improved economic prospects relative to those of the U.S. Read more.
I wrote all this late at night in a Copenhagen hotel room. For whatever that’s worth.