When the dollar went up, everything else (sterling, the Deutschemark, French franc, Japanese yen, gold) went down; or the reverse happened - the dollar went down and everything rallied. There were occasional bouts of diversion from this model, when certain specific currencies - most often sterling and sometimes oddments like the Italian lira and, very occasionally, the French franc - did something strange - but, in general, if you could figure out the dollar, you would do pretty well.
Of course, this hegemony of the dollar merely reflected the United States' position in the world - the Biggest Daddy of the Free World, and, after the collapse of the Soviet Union (1991), the Only Daddy Around. Indeed even after the euro was born in 1999, this singular position of the dollar - with EUR/USD and USD/JPY moving in tandem as much as 87-88 per cent of the time - remained in place all the way till May 2011, through even the Lehman Brothers collapse.
Then came the European sovereign debt crisis and - in foreign exchange markets as elsewhere - all hell broke loose. The correlation between Europe and the rest of the non-dollar world fell apart, with EUR/USD and JPY/USD moving in sync as little as 30 per cent of the time between May 2011 and May 2013. It was as if, from a foreign exchange point of view, at least, Europe was being stripped away from US domination.
Running its own show, the euro sank like a stone, but, more frighteningly, it looked increasingly like it was curtains for the euro and that it would fall apart.
But, there out on the hill, stood Germany. Discreet, as always, at first, but then donning shining silver lederhosen, it slowly but surely acknowledged that it was taking full charge of the euro zone.
While, of course, the political fictions remain - the European Central Bank is different from the Bundesbank; the European Parliament is more than a comedy show - the truth is that, at some level, markets must have always known that if ever things turned sour, Germany would step in and take control. The euro could never have sustained substantially above 1.15 or 1.20 if the market didn't believe in the German defensive line - only four goals in eight matches.
With this belief confirmed, the market has been steadily returning to what some see as excessive stability. Currency volatilities are at all-time lows, high-yield (including European sovereign) bonds are rocking, as are equities. The wobble in Portugal last week was a thin reminder of the bad old days, but then, remembering how comprehensively Germany managed Portugal in the FIFA World Cup, the market simply shrugged it off.
Interestingly, the correlation between the euro and Japanese yen has been slowly recovering - it is back above 50 per cent, a long way from the 85 per cent-plus that prevailed in the status quo years, but still quite a jump from the 30 per cent correlation when it looked like the euro was going to fall apart. The question is whether markets will continue the trend back to the future or whether a lower correlation will hold, reflecting the reality that Europe (led by Germany) is becoming more independent of the dollar-dominated world that had prevailed thus far.
Indeed the United States' geopolitical fumblings over the past decade, particularly in Iraq where the godawful results are there for all to see, suggest a crying need for a new paradigm. [As an aside, I wonder what would have happened if, instead of invading Iraq, George Bush had invaded Saudi Arabia - certainly, a huge amount of global terrorist funding would have dried up; perhaps, the Shia-Sunni schism, which United States' action against Iran (instigated, of course, by Saudi Wahhabism) has continuously aggravated, may have been less cancerous today; and oil prices - well, they'd likely be more or less where they are today.]
In any event, the United States is increasingly - and appropriately - focused inwards. This is good, both for the United States (which needs to find a solution to the huge equality gap that is widening) and for the rest of the world (that ultimately benefits from surges in American creativity, which is often the result of American introspection).
It is clearly time that Germany - with unquestioned sound process and, importantly, occasional flair - steps up to the plate. Perhaps its World Cup victory will provide the impetus.
jamal@mecklai.com