In 1995, Clinton's Treasury Secretary Robert Rubin uttered five words that would define American currency policy for a generation: "A strong dollar is in America's interest." It was the simplest, most effective piece of financial communication ever crafted. Within six years, the dollar surged 50%, capital flooded into American assets, and the Asian financial crisis proved that dollar weakness was worse than dollar strength.
Robert Rubin came to the Treasury from Goldman Sachs, where he had spent twenty-six years navigating markets. He understood something that his predecessors had not: that currency policy was as much about psychology as economics. For a decade, Treasury Secretaries had talked the dollar down — or at best stayed silent while markets did the work. Rubin reversed the signal.
His logic was straightforward. A strong dollar made imports cheaper, keeping inflation low. It made American assets more attractive to foreign investors, reducing the cost of financing government deficits. And it forced American companies to compete on productivity rather than currency advantage — a painful discipline that, over time, would make them stronger.
The market heard the message. After a decade of decline — from 129 at the Plaza Accord to 80 at the 1995 trough — the dollar began a sustained rally that would carry it to 120 by mid-2001. The DXY gained 50% in six years, almost exactly reversing the Plaza Accord's damage.
Three forces converged to power the Rubin rally, each reinforcing the others in a virtuous cycle that lasted six years.
The productivity miracle. The 1990s saw the United States experience its strongest sustained productivity growth since the 1960s. The internet revolution, corporate restructuring, and massive technology investment pushed output per worker up 2.5% per year — double the rate of Europe and Japan. Higher productivity meant higher corporate profits, which meant higher stock prices, which attracted foreign capital, which pushed up the dollar. The S&P 500 rose from 459 in January 1995 to 1,527 in March 2000 — a 233% gain. Foreign investors wanted in, and they needed dollars to get there.
The fiscal turnaround. The Clinton administration, with Rubin's guidance, prioritized deficit reduction. The federal deficit shrank from $164 billion in 1995 to a $236 billion surplus in 2000 — the first surplus since 1969. A government that was borrowing less needed to issue fewer bonds, reducing the supply of dollars. At the same time, foreign demand for dollars was surging. Less supply, more demand: the dollar rose.
The Asian crisis. On July 2, 1997, Thailand devalued the baht. Within months, the crisis had spread to Indonesia, Malaysia, South Korea, the Philippines, and — most dramatically — Russia, which defaulted on its sovereign debt in August 1998. The crisis destroyed the "Asian miracle" narrative and sent capital fleeing to the one place that still looked safe: the United States. The dollar surged from 88 to 101 in the second half of 1997 alone — a 15% gain in six months.
The Asian crisis was a watershed for the dollar. Before 1997, the case for emerging market investment was simple: high growth, cheap labor, rapid modernization. After 1997, investors learned that these benefits came with risks that could annihilate capital overnight. Thailand's stock market fell 75%. Indonesia's currency lost 80% of its value. South Korea needed a $58 billion IMF bailout. Russia's default triggered the collapse of Long-Term Capital Management, a hedge fund whose failure threatened to destabilize the entire global financial system.
Every crisis reinforced the same lesson: when things go wrong, sell everything and buy dollars. The dollar was not just a currency — it was insurance. And in a world that suddenly felt much more dangerous than it had in 1995, insurance was worth paying for.
The LTCM panic. In September 1998, the near-collapse of LTCM — which had $125 billion in assets and $1.25 trillion in derivatives exposure — forced the Federal Reserve to orchestrate an emergency bailout. Greenspan cut rates three times in seven weeks. The dollar briefly weakened, falling from 101 to 93 between July and November 1998. But the episode ultimately strengthened the dollar narrative: the United States had the institutional capacity to manage financial crises. Other countries — Thailand, Indonesia, Russia — did not.
The dot-com summit. By 2000, the dollar rally was being powered by pure capital magnetism. The NASDAQ had risen 571% since 1995. Foreign investors were buying American tech stocks, American venture capital, American Treasury bonds. The current account deficit — the broadest measure of America's external borrowing — had ballooned to $417 billion, or 4.2% of GDP. But it didn't matter. As long as foreign capital kept coming, the dollar kept rising.
The DXY hit 119.83 on July 2, 2001 — a level not seen since the Plaza Accord era. Then the world changed.
| Year | DXY | Change | Fed Funds | Key Event |
|---|---|---|---|---|
| Apr 1995 | 82.2 | — | 6.0% | Dollar trough; Rubin articulates "strong dollar" policy |
| 1996 | 88.7 | +8% | 5.3% | Quiet year; dollar drifts higher on productivity gains |
| Jul 1997 | 95.6 | +8% | 5.5% | Thailand devalues baht; Asian crisis begins |
| Jan 1998 | 100.0 | +5% | 5.6% | Dollar breaks 100; Asian crisis spreading |
| Aug 1998 | 100.9 | +1% | 5.6% | Russia defaults; LTCM collapses |
| Oct 1998 | 95.4 | −5% | 5.1% | LTCM panic dip; Greenspan cuts 3 times in 7 weeks |
| 1999 | 102.5 | +7% | 5.3% | Dot-com mania; euro launches (weakly) |
| Oct 2000 | 114.0 | +11% | 6.5% | Dollar near peak; NASDAQ already falling |
| Jul 2001 | 119.8 | +5% | 3.8% | DXY peaks; dot-com recession; 9/11 two months away |
| Sep 2001 | 115.8 | −3% | 3.1% | September 11 attacks; dollar holds remarkably well |
| Feb 2002 | 119.6 | +3% | 1.7% | Last gasp rally; dollar peaks for the cycle |
| Dec 2002 | 106.4 | −11% | 1.2% | Dollar rolling over; Iraq war looming; Rubin era truly over |
The most remarkable feature of this table is the July 2001 peak. The dollar hit its highest level at a moment when the American economy was already in recession, the stock market was crashing, and interest rates were being slashed. How? Inertia. The strong dollar policy had become self-reinforcing: foreign central banks held trillions in dollar reserves, foreign corporations priced their goods in dollars, and the network effects of dollar dominance kept capital flowing even when the fundamentals had turned.
September 11 barely dented the dollar. It fell 3% in the immediate aftermath, then bounced back to 119.6 by February 2002. Markets interpreted the attacks as geopolitically bearish for the world but not specifically bearish for the dollar — the United States was still the safest place to park capital, even under attack.
The real turn came later. By December 2002, the dollar had fallen 11% from its peak, and the decline was accelerating. The strong dollar policy had run its course. The next era — defined by the Iraq War, Greenspan's low-rate policy, and the subprime boom — would take the dollar to its lowest level in history.
Robert Rubin proved that currency policy is partly a confidence game. By consistently signaling that the United States wanted a strong dollar, he attracted the very capital flows that made the dollar strong. It was a self-fulfilling prophecy powered by the most powerful economy in the world during its most productive era.
But the strong dollar also planted seeds that would bloom into crisis. It made American goods uncompetitive, hollowing out manufacturing and widening the trade deficit to unsustainable levels. It encouraged the United States to consume beyond its means, financing consumption with foreign capital that would eventually need to be repaid. And it taught emerging markets a dangerous lesson: the way to protect yourself from another 1997 is to accumulate massive dollar reserves — a strategy that would distort global capital flows for the next two decades.
The next episode covers the Great Dollar Decline — the seven-year slide from 120 to 71 that coincided with the Iraq War, the housing bubble, and the most destructive financial crisis since the Great Depression.