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Major Movers of the Financial Markets in the Past 20 Years: Part 1

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US Dollar Index

The US Dollar Index measures the strength of the US dollar against a basket of six major currencies. These include the euro, the Japanese yen, the British pound, the Canadian dollar, the Swedish krona, and the Swiss franc. Of those currencies, the euro accounts for more than 50% of the basket. The Japanese yen and the British pound come in second and third at more than 10% of the basket. As a result, when the euro, the yen, and the pound get stronger against the US dollar, the US Dollar Index falls, and vice versa.

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US Dollar Index over the past 20 years

The graph above shows the ups and downs of the US Dollar Index plotted against the ten-day moving standard deviation. This is a simple measure of the volatility of the index. In this article, we’ll cover the major happenings of the past 20 years that have caused volatility in the index.

Asian financial crisis and the dot-com bubble

In 1997, the volatility of the financial markets began when the currency markets in Thailand decided to no longer peg their currency to the US dollar. This spread rapidly to other Asian countries, initiating a currency war. The result was competitive devaluations and depreciations of their respective currencies in order to maintain their economies.

The crisis resulted in huge reforms in the financial sectors. The Asian crisis was followed by an era of low interest regimes, which eventually paved the way to the the dot-com bubble and the global financial crisis. This, in turn, resulted in huge losses in the SPDR S&P 500 ETF (SPY) and the SPDR S&P MidCap 400 ETF (MDY).

The dot-com bubble took place between 2000 and 2002 when Internet-related stocks soared in value. This was unsustainable and eventually resulted in the failure and consolidation of many companies. Some of the companies that survived the crisis and are still in business include Amazon.com (AMZN), eBay (EBAY), and Priceline Group (PCLN).

We’ll continue our discussion of the major movers of the financial markets in the next part of the series.

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