Examining depreciation trends during economic stagnation
October 26, 2011
According to a historical study by Goldman Sachs researchers, the years running up to and during economic stagnation tend to see lower year-to-year foreign exchange (FX) volatility, Reuters reports. However, the effect can vary depending on the length of the sub-par economic growth period.
An average stagnation is categorized as lasting for at least six years. In the years before the period as well as the first portion of it, FX appreciation is typically moderate. This is followed by a time of flatness before a depreciation
trend can begin to be seen over the last years. The news source notes that the ultimate depreciation is typically less than 10 percent.
During a time of "Great Stagnation" which is defined as lasting for at least a decade, depreciation tends to exceed 10 percent and the initial appreciation of the years before can exceed 20 percent.
A Danske Bank forecast in August predicted that "the dollar depreciation trend will continue for longer than previously expected and ... the dollar will not least depreciate against currencies backed by central banks where potential for further rate hikes remains," according to Action Forex.