January 21, 2021
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 fallen 3.8% from where it was at this time last year and it is expected to continue to decline throughout 2021.
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 fallen 6.5% over the past year. A year ago one dollar would buy 6.92 yuan. Today it buys 6.47yuan.
The U.S. dollar has fallen 3.7% versus the Canadian dollar during the past year. For example, a year ago one U.S. dollar would purchase $1.301Canadian dollars. Today it will buy $1.26 Canadian dollars.
And against the Mexican peso the dollar has risen by 6.1% during the past year. A year ago one dollar would buy 18.8 Mexican pesos. Today it will buy 19.5 pesos.
The dollar has weakened by 4.9% against the yen during the course of the past year. A year ago one dollar would buy 109.3yen. Today that same one dollar will buy 103.9 yen.
The dollar has fallen 10.3% relative to the Euro during the past year. A year ago one Euro cost $1.11 Today one Euro costs $1.22.
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.
The dollar’s recent weakness is partially attributable to a widespread belief that the U.S. budget deficit has already exploded in the wake of the $3.0 fiscal stimulus package adopted in March of last year, the additional $900 billion package passed in December, and an additional $1.9 trillion package that has been proposed by Biden and the Democrats. At the same time commodity prices — both energy and non-energy prices — have been rising steadily since the spring as the U.S. economy grew much more rapidly than expected in 2020, and is expected to grow rapidly in the coming year given the additional fiscal stimulus. Because commodities are traded in dollars, an increase in commodity prices means that country is receiving more of their local currency for the goods they export, and therefore need fewer dollars to purchase the goods that they import. This dollar drop is likely to provide additional stimulus to GDP growth this year via faster exports and reduced imports, and contribute to a pickup in the inflation rate as the prices of imported goods increase.