It was just over three years ago that the dollar hit an all-time low against most of the world's currencies. Since then it has come roaring back, especially in the past several months. Gains have been uneven—huge gains against the yen, but not much against the pound, for example—and on balance the gains have simply restored the dollar to something close to its average value since the early 1970s. These gains may continue and could become problematic if they are excessive and rapid—strong and stable currencies are the healthiest—but for now it's appropriate to cheer the return of King dollar.
The dollar has gained 22% against the euro since last March, and it is up 40% from its all-time low against the euro in 2008. The green line represents my estimate of the euro/dollar purchasing power parity: the level of the euro that would make prices for goods and services in the Eurozone roughly comparable to those same prices in the U.S. At today's exchange rate, American tourists in the Eurozone are likely to come away thinking that prices over there are about the same as they are here. Changes in the level of the PPP exchange rate are driven by changes in relative inflation rates. The upward slope of the green line over the decades means that inflation has been higher in the U.S. than it has in Europe.
The Australian dollar soared coming out of the Great Recession, boosted by soaring commodity prices. A lot of that has been reverse in the past several years as commodity prices have weakened. Still, the Aussie dollar remains quite strong vis a vis the dollar, according to my PPP calculations.
Like the Aussie dollar, the Canadian dollar has been on a roller coaster ride, driven by swings in commodity prices. The dollar has gained 30% vis a vis the Canadian dollar since its low of 0.95 in 2011. Prices in the U.S. and Canada are approaching parity these days.
The British pound has been relatively stable against the dollar, on balance, for the past six years. However, higher inflation in the U.K. should tend to depress the value of the pound over time. The U.K. is still somewhat expensive for U.S. tourists.
The dollar has gained an impressive 55% against the yen in the past three years, rising from a low of 76 to 118 today, thanks largely to the Bank of Japan's aggressive monetary easing. The yen had been appreciating against almost all other currencies for decades, and had reached a very expensive level. With the yen now more "normally" priced, manufacturers and exporters should find some relief. But the economy is not likely to strengthen meaningfully unless and until fiscal policy becomes more growth-friendly.
Using the Fed's Real Trade-Weighted Dollar Index (based on the latest reading as of the end of November), I estimate that the dollar today has gained about 30% against a basket of major currencies in the past three years. This puts it about 5% or so above its average since 1973. That's an impressive comeback in three years, and it owes a lot to the fact that the U.S. economy—despite suffering its weakest recovery ever—is arguably the strongest of all developed countries.