The four-year cycle and the dollar

The famous psychologist Abraham Maslow once quipped that if all you have is a hammer, every problem resembles a nail.

Rarely is this truer than in the foreign exchange market, where the best-trained economic minds hammer away at political variables with economic tools. The economic impact of political developments is often difficult to assess, let alone quantify. The recent failure of heightened geopolitical tensions to benefit traditional “safe havens” such as the Swiss franc is a case in point.

Some market technicians and economists focus on economic and price cycles. There have been some attempts, such as the Kondratieff Cycle, to try to link some types of political developments to larger (e.g., 50-year) wholesale price cycles.

Equity analysts seem further along in finding cyclical patterns than their foreign exchange counterparts. There has, for example, been a well-known regularity in the U.S. stock market whereby an important bottom is recorded almost every four years since 1962. Similarly, some technical work finds the second year of a presidential term tends to coincide with a market bottom and the beginning of a recovery.

The best quarterly period appears to be the fourth quarter of the second year, which corresponds with the October- December period this year.

Drawing conclusions about similar cycles in foreign exchange prices, however, is more difficult because of the limited sample size. Although equity markets have a long history, the price of the dollar was fixed for most of this country’s existence. It was not until President Richard Nixon’s unilateral decision to break the dollar’s link to gold on Aug. 15, 1971 that the current era of floating exchange rates was ushered in.