SPHY - Weekly Market Pulse: Deja Vu All Over Again

2025-05-05 04:26:00 ET

Summary

• The dollar is down 8.6% since President Trump’s inauguration, almost exactly mirroring Nixon’s Smithsonian Agreement devaluation.
• Stocks have made a remarkable comeback from their April lows, but the dollar has not. While stocks managed a 3% gain last week, the dollar managed to eke out a mere 0.5%.
• Credit spreads remain slightly elevated and have not shown the same resiliency as stocks. Still, spreads are less than the long-term average and don’t signal any threat yet.

From The Burden of Bretton Woods, The Richard Nixon Foundation:

…by the 1960s, the expansion of global production and trade increased the amount of dollars circulated worldwide — so much so that dollar circulation far outstripped the U.S. gold supply. There simply was not enough gold to back excessive liquidity, making it evident that the U.S. dollar was overvalued.

Because the Bretton Woods system barred the United States from revaluing its currency, the Nixon administration pressured world leaders to revalue their currency . Their requests were heeded by some but ignored by others. Countries such as Japan were reluctant to do so lest they jeopardize their competitive export industry. As a result, countries began holding more and more U.S. dollars as reserve assets to maintain their value. By the mid-1960s, this practice was global; a third of the total market-economy reserves were held in reserve currency, a majority being made up of U.S. dollars.

From the “Nixon Shock” speech on August 15th, 1971:

The time has come for a new economic policy for the United States.

• The tax reductions I am recommending, together with this broad upturn of the economy which has taken place in the first half of this year, will move us strongly forward toward a goal this Nation has not reached since 1956, 15 years ago: prosperity with full employment in peacetime.
• Tax cuts to stimulate employment must be matched by spending cuts to restrain inflation . To check the rise in the cost of Government, I have ordered a postponement of pay raises and a 5 percent cut in Government personnel.
• I have ordered a 10 percent cut in foreign economic aid.
• 80 million American wage earners have been on a treadmill. For example, in the 4 war years between 1965 and 1969, your wage increases were completely eaten up by price increases. Your paychecks were higher, but you were no better off.
• I have directed Secretary Connally to suspend temporarily the convertibility of the American dollar except in amounts and conditions determined to be in the interest of monetary stability and in the best interests of the United States. Now, what is this action – which is very technical – what does it mean for you? Let me lay to rest the bugaboo of what is called devaluation. If you want to buy a foreign car or take a trip abroad, market conditions may cause your dollar to buy slightly less. But if you are among the overwhelming majority of Americans who buy American-made products in America, your dollar will be worth just as much tomorrow as it is today.
• As a temporary measure, I am today imposing an additional tax of 10 percent on goods imported into the United States.
• It is an action to make certain that American products will not be at a disadvantage because of unfair exchange rates.
• As a result of these actions, the product of American labor will be more competitive, and the unfair edge that some of our foreign competition has will be removed. This is a major reason why our trade balance has eroded over the past 15 years.

…now that other nations are economically strong, the time has come for them to bear their fair share of the burden of defending freedom around the world.

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