Title: How Unemployment and Inflation Affect the Dollar Exchange Rate | American Express
Headings: 
How the Unemployment Puzzle Could Affect the Dollar Exchange Rate
Unemployment, Inflation, and the Dollar’s Exchange Rate
How the Phillips Curve Determines the ‘Neutral’ Rate of Unemployment
Unemployment, Under-Employment and Participation Rates
Longer-Term Trends May Permanently Change the Unemployment-Inflation Relationship
The
Takeaway:
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Content: An explanation given by Lael Brainard, Federal Reserve Governor, is that people now expect inflation to be low, so don’t demand pay rises. 9 Wage growth has indeed been subdued by historical standards since the crisis, running at below 3 percent until late 2018. 10 Expectations of low inflation could partially explain the strength of the U.S. dollar exchange rate in recent years, since low inflation makes U.S. dollar-denominated assets attractive to investors. However, there are alternative explanations. One is that the growth of temporary, casual, part-time and flexible contract work after the crisis led to many people being under-employed (doing fewer hours’ work per week than they want to), and others dropping out of the workforce because they did not think they could find employment – these are known as “discouraged workers.” 11 Under-employment and labor market exit were not measured in unemployment figures but nevertheless exerted considerable downwards pressure on pay. However, under-employment is diminishing as the economy improves, and people who dropped out of the workforce are now returning. As a result, wages are now growing more strongly. 12 This has yet to be reflected in higher inflation, but if and when it does, the U.S. dollar exchange rate could fall. So, the Phillips Curve relationship could still hold if the definition of “unemployment” is widened to include under-employment and discouraged workers.