I’ve just finished readingÂ Making Sense of the Dollar: Exposing Dangerous Myths about Trade and Foreign Exchange by Marc Chandler. You may be familiar with Chandler from appearances on CNBC. He is currently the Chief Foreign Exchange Strategist at Brown Brothers Harriman, having prior held a similar post with HSBC. He’s written a number of magazine and online articles, and teaches at NYU as well.
What Chandler looks to do with Making Sense of the Dollar is to dispute many of the commonly held views about the US currency,Â international trade, and related economic and political considerations. He does this by presentingÂ ten myths and criticisms of them. Those myths are:
- TheÂ Trade Deficit Reflects US Competitiveness
- The Current Account Deficit Drives the Dollar
- You Can’t Have tooÂ Much Money
- Labor Market Flexibility is the Key to US Economic Prowess
- There is One Type of Capitalism
- The Dollar’s Privileged Place in theÂ World is Lost
- Globalization Destroyed American Industry
- US Capitalist Development Prevents Socialism
- The Weak US Dollar Boost Exports and Drives Stock Markets
- The Foreign Exchange Market is Strange and Speculative
I went into the book looking to view it from the perspective of a forex trader (and in my own case, analyst as well). With that in mind, whileÂ the amountÂ of repetition was at times annoying, and in some places the authorÂ could have presentedÂ more evidence to supportÂ his assertions, the book certainly contains a lot of thought-provoking material.
The myth sections I found most interesting in regards to gaining insight into the workings of the dollar are 1, 2, 6, and 9. Not that the others aren’t interesting. It’s just that these four really, for me, get to the majorÂ critical issuesÂ which a lot of market watchers point at in terms of why the dollar has lost or can be expected to lose its position as the premier world currency.
I can tell you that the trade and current account deficits are things my professional colleagues often point to as unsustainable issues which eventually will have to correct – to the detriment of the dollar. Chandler says both are flawed measures based on outdated methodologies which do not properly account for modern trade and capital flow.
In terms of Myth 6 about the dollar losing its place, the author brings up a number of defenses for the greenback. One of them is the view that I myself have expressed on several occasions that one of the reasons that the dollar is the topÂ reserve currency is the breadth and depth of the US financial markets. No other country or region can come close to matching them, making the US the place where excess savings looking for a safe place to sit comes, as witnessed by the dollar’s gains during risk aversion.
As to the idea that the lowering dollar’s exchange rate will boost exports and reduce imports, Chandler indicates that there’s no real evidence to support that notion. For example, he notes that in the early 90s a pair of Congressmen suggested that the dollar was 20% overvalued and that it needed to come down to close the trade gap. The dollar trended down for most of the decade, losing about 20% of its value in that span, but the trade deficit actually expanded. The author also points out that much of the cost of import goods to US citizens is actually added on to them once they reach our shores, so that the value of the dollar isn’t really a major influence on the prices we see. And of course he also points out that the largest portion of our imports comes in the form of oil and related products, the demand for which is relatively inelastic over the short- to intermediate-term.
New forex traders can often be heard to ask questions about what fundamental factors drive exchange rates, and with good reason. It can be a very confusing market in that regard as things which are clear drivers in one direction one week can be drivers in the other direction later. Chandler does a really good job in the space of a couple of pages in the 10th myth chapter of addressing the primary factors impacting the forex market and the concept of currency valuation. That’s really the only place “trading” of currencies is discussed. The rest of the book is more focused on looking at the big macro dollar picture.
As much as Chandler makes some interesting points about Capitalism vs. Socialism, in my view he spends too much time on the subject. One could even ask whether he needed to address it at all, but I was fine with it overall. He just got a bit repetitive on the subject.
The bottom line as far as Chandler is concerned is that the dollar is just fine the way it is and that attempts to focus on imports and exports and weaken the dollar to influence them could produce serious negative consequences. I definitely recommendÂ Making Sense of the Dollar to anyone interested in the macro view of the dollar and global currency markets.
Make sure to check out my other tradingÂ book reviews.