October 8, 2019
The trade-weighted value of the dollar, which represents the value of the dollar against the currencies of a broad group of U.S. trading partners has risen 4.0% from where it was at this time last year.
When you try to figure out the impact of currency movements on our trade, you have to weigh the movements depending upon the volume of trade we do with that country. For example, our largest trading partners are:
With respect to the Chinese yuan the dollar has risen 4.3% over the past year. A year ago one dollar would buy 6.85 yuan. Today it buys 7.15 yuan.
The U.S. dollar has risen 1.8% versus the Canadian dollar during the past year. For example, a year ago one U.S. dollar would purchase $1.30 Canadian dollars. Today it will buy $1.33 Canadian dollars.
And against the Mexican peso the dollar has risen by 2.2% during the past year. A year ago one dollar would buy 19.0 Mexican pesos. Today it will buy 19.4 pesos.
The dollar has weakened by 3.5% against the yen during the course of the past year. A year ago one dollar would buy 112.1 yen. Today that same one dollar will buy 108.2 yen.
The dollar has risen 5.4% relative to the Euro during the past year. A year ago one Euro cost $1.17. Today one Euro costs $1.10.
Thus, the dollar has strengthened against almost every major currency during the course of the past year. As a result, the trade-weighted value of the dollar, as noted earlier, has risen 4.0% during the past year.
Currency changes can affect the economy in several ways. First, a rising dollar can reduce GDP growth of U.S. exports because U.S. goods are now more expensive for foreign purchasers to buy. Similarly, a rising dollar can increase growth of imports because foreign goods are now cheaper for Americans to buy. Fewer exports and more imports will reduce GDP growth that year. A rising dollar can also reduce the rate of inflation in the U.S. because the prices of foreign goods are now lower. A falling dollar will do the opposite — increased growth in exports, slower growth in imports, and a faster rate of inflation.
From October 2014 to January 2016 the dollar rose 22%. That is a huge change. The trade component subtracted about 0.5% from GDP growth in both 2014 and 2015. A 4.0% increase in the dollar in the past 12 months is expected to reduce GDP growth this year by 0.1%.
The dollar’s recent strength is attributable to the widespread imposition of tariffs and sanctions by the U.S. which are believed to reduce growth in other countries more than they weaken growth in the U.S. While changes in the value of the dollar relative to the currencies for our major trading partners have been noted above, it is also important to recognize that the combination of tariffs and sanctions has strengthened the dollar against the Brazilian real, the South African rand, and the Russian ruble. The emerging economies have been particularly hard hit.