Monday, 11 of December of 2017

Economics. Explained.  

Trade-Weighted Dollar

November 3, 2017

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 2.5% 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 weakened  about 1.0% over the past year.  A year ago one dollar would buy 6.73 yuan.  Today it buys 6.65 yuan.

The U.S. dollar has weakened 5.6% versus the Canadian dollar during the past year.  For example, a year ago one U.S. dollar would purchase $1.33 Canadian dollars.  Today it will buy $1.25 Canadian dollars.

And against the Mexican peso the dollar has weakened by 3.2% during the past year.  A year ago one dollar would buy 18.9 Mexican pesos.  Today it will buy 18.3 pesos.

The dollar has strengthened by 8.5% against the yen during the course of the past year.  A year ago one dollar would buy 104  yen.  Today that same one dollar will buy 113  yen.

The dollar has weakened 6.6% relative to the Euro during the past year.  At that one Euro cost $1.10.  Today one Euro costs 1.17.

Thus, the dollar has weakened against every major currency except the yen during the course of the past year.   As a result, the trade-weighted value of the dollar, as noted earlier, has fallen 2.5% during the past year.

Currency changes can affect the economy in several ways.   First, a rising dollar can reduce growth of U.S. exports because U.S. goods are now more expensive for foreign purchasers.  Similarly, a rising dollar can accelerate growth of imports because foreign goods are now cheaper for Americans to buy.  A rising dollar can also lower the rate of inflation in the U.S. because the prices of foreign goods are likely to fall.

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.  We expect the dollar to fall about% this year.  If that is the case the trade component of GDP should add about 0.3% to GDP growth in 2017.  In 2018 we expect little change in the value of the dollar and, hence, the trade component should be roughly a neutral factor in calculating GDP growth next year.

Stephen Slifer

NumberNomics

Charleston, SC


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