Market History

Using the past to rationally predict the future.

Why did the U.S. dollar peak in 2001 and 2002?

The U.S. dollar made a massive 6 year rally from 1995 to 2001, which coincided with the U.S. internet boom. Money flowed into the U.S. to take part in this historic new industry. When the internet bubble burst in 2000, the U.S. dollar kept on going up until it made a double top in early-July 2001 and late-Februrary 2002. After March 2002, the U.S. literally went straight down without any meaningful bounces.

Here is a picture of the U.S. dollar index using weekly bars.

The question is, why did the U.S. dollar go up during 2001, and why did it suddenly crash after March 2002?

Why the U.S. dollar went up

The U.S. dollar went up from 2000 to July 2001 because the NASDAQ (tech stocks) crashed in 2000 and the U.S. entered into a recession from March – November 2001. The USD topped before the recession ended, which is normal. The U.S. dollar topped in March 2009 even though the 2008-2009 recession ended in June 2009. The economy always starts to recover before the recession ended. The U.S. dollar rallies during situations that require a safe haven.

We do not know why the U.S. dollar made a double top from September 2001 to March 2002. It was not due to the 9/11 terrorist attacks: the U.S. dollar sank on this news. Perhaps it was due to all the accounting scandals (e.g. Enron). It was not because of the U.S. stock market’s crash, which continued long after March 2002. We’re still trying to understand this market movement.

Why the U.S. dollar topped in early 2002

This reason is obvious.

The Euro was introduced in physical form on January 1, 2002 (there were now Euro paper bills and coins), making it the official currency of the Euro members. Over the next few months, these countries phased out their own currencies until the Euro had completely replaced these currencies by May 2002. People were saying “here’s a new currency that’s finally big enough to compete with the U.S.!” (the Euro area has a larger population than the U.S. and has a slightly smaller GDP than that of the U.S.) Investors rushed to buy Euro.

As you can see, the Euro bottomed in January 2002, after which it went up month-after-month. The Euro accounts for more than half of the USD Index, which is why the US dollar tanked.

The tech collapse of 2000-2002 did not really impact Europe, whose economy was relatively unscathed. With the introduction of a new currency (the Euro), money naturally flowed to Eurozone nations. And with the emergence of China in the next few years, more American money flowed to China than the other way around. That’s why the U.S. dollar embarked on a multi-year bear market from 2002 to 2007.

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