December 08, 2003

The stellar U.S. economic performance has taken place even though the dollar has declined 14%. How can we explain this? Our answer is simple, exchange rate changes only measure changes in relative performance. All we can tell is that the country with the depreciating currency should underperform the countries with appreciating currencies. The regional stock return indices are outperforming the U.S. The exchange rate does not tells us whether things are good or bad in the U.S., it only tells us whether they are improving or deteriorating relative to the rest of the world.

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