Rising currencies are not necessarily a sign of strength. The U.S. dollar rose sharply before and during the recession of 2001. The trade‐weighted index of the dollar’s value against 26 currencies rose 10.5% from March 2000 to January 2002, as the stock market and economy tumbled.
A graph in the Aug. 5–11 issue of The Economist showed that, “countries whose currencies have gained most [against the dollar] are high interest‐rate economies, such as Turkey, Brazil and New Zealand, commodity producers, such as Canada, or a mixture of both, such as Australia.”
Central‐bank interest rates are 16.75% in Turkey, 11.25% in Brazil, 8.25% in New Zealand, 6.75% in Australia and 5.75% in the U.K. High interest rates may prop up a currency for a while by attracting international “hot money.” But super‐high interest rates, like those in Turkey and Brazil, are typically a symptom of inflation‐prone monetary policy, requiring a high risk premium to bribe investors to hold that country’s IOUs. In any case, high interest rates are certainly not something most Americans would envy or hope to emulate.
The spectacular rise of the Canadian dollar was more closely tied to the price of oil than to interest rates, although the Bank of Canada did raise interest rates in July, just before the Fed began nudging rates down.
While prices of oil and gold were soaring, exporters of oil and gold such as Canada could trade their wares for more U.S. technology and services. Such improved “terms of trade” typically raise the global demand for the assets of commodity‐producing countries and thereby raise their currencies.
Other commodity exporting countries, such as Australia and to some extent the U.K., also see their currencies rise whenever the price of their exports rises faster than the price of their imports. Trade deficits have nothing to do with it. Australia’s current account deficit is a bit larger than that of the U.S., as a share of GDP, and Britain’s deficit is not much smaller.