Taking a Long View of the Dollar – Currency Thoughts
Taking a Long View of the Dollar
May 17, 2026
A paradox of recent foreign exchange conditions is that while the phenomenon of upwardly shifting inflation prospects and downwardly shifting economic growth forecasts concerning 2026 around the world was a by-product of the U.S. decision to wage war against Iran, the U.S. dollar has so far weathered the storm surprisingly well. As the world’s hegemonic reserve paper currency, the dollar has benefited from capital inflows prioritizing return of investment over return on investment.
The irony of this paradox is that the very same country causing a shock to the system has seen its own currency benefitting from the unexpected change in political and economic fundamentals. A further irony is that the war to prevent Iran from obtaining a nuclear weapon is casting doubt on the very intangibles that elevated the dollar and sustained its singular identity of being the world’s most trusted and used currency for storing value and making financial and trade transactions. These include comparatively strong long-term growth, an independent central bank, deep and broad capital markets with relatively low restrictions against capital flows and currency usage, a strong military, a reliable protector of western democracies, governance by laws rather than people, and a stable political environment to sustain those images.
The dollar’s entitlement to reserve currency status has until now survived some very large market swings, including deep declines. In addition to retaining confidence that the America of our fathers will be the America of coming generations, the dollar has benefited from a lack of potential challenging currencies that fail to meet all the preconditions that the dollar has to attain top reserve currency status and the huge economic privileges that the distinction bestows.
The turbulence of the dollar while remaining the lynchpin of the postwar global monetary systems is well documented. From pre-1971 highs to lows late in October 1978, the dollar plunged on balance by about half against the Deutsche mark and Japanese yen. The trade-weighted dollar index soared in the first half of the 1980’s to a peak of 160.4 in February 1985, only to then fall to a reading of 80.58 by July 1992. It thereafter rebounded 49.4% by February 2002, only to then slump 41.3% by March 2008 when the financial crisis was picking up steam. By September 2022, the dollar had against recovered, climbing to a level 62.3% above the 2008 low. The first year of President Trump’s quest to make America great was not reflected in the dollar, which lost ground, but in these scary and highly uncertain times, juxtaposed against the promises of artificial intelligence to come, the dollar’s trade-weighted value has held its own and is currently quoted close to 100 at 99.27.
Historical periods of dollar depreciation were frequently associated with comparatively high U.S. inflation and/or widening deficits in the U.S. trade balance and current account. The record shows that in this era of market-determined dollar exchange rates that maintaining its rank atop the list of preferred currencies is not a guarantee against dollar depreciation. However, the same claim cannot be made that a significant loss of the dollar’s reserve currency aura could be associated with an appreciating dollar or even one that remains stable but firm.
Before the dollar, sterling was the king of all currencies. Britain’s currency lost that distinction after the second world war. Sterling was fixed at $4.03 during the war and reset at $2.80 in 1949. By early 1985, it had fallen as low as $1.0345 and is currently near $1.33. If American leadership continues to take for granted the factors that made the American dollar a cherished store of value, a time will come when that trust may be lost irrevocably. Nailing down the timing of that point of no return is fraught with humility. But that’s not the same as saying such a turn for the worse could never happen.
Copyright 2026, Larry Greenberg. All rights reserved.
Tags: U.S. dollar
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