One way to assess the performance of the U.S. dollar is to compute an index of other countries’ currencies, with each one weighted according to how much the U.S. trades with that country. The graph shows two versions of such an index: The “real” index factors in the evolution of prices in each country, essentially accounting for deviations from the long-run equilibrium. The nominal index makes no such adjustment and reflects the typical market listings of foreign exchange rates. The graph makes clear that the U.S. dollar has appreciated in the long run against the currencies of its major trading partners. For example, the dollar appreciated recently when euro area countries had their debt troubles and the dollar became a refuge for investors and consumers. The graph also shows how the two indexes have been basically parallel since the mid-1990s, reflecting the convergence of inflation rates across major economies after the creation of the euro.
How this graph was created: Search for “trade weighted index broad” and select the two monthly indexes.
Suggested by Christian Zimmermann
View on FRED, series used in this post: