New Highs for the Fed’s Real Broad Trade-Weighted Dollar Index

The Fed’s real broad trade weighed dollar rose to new multi-year highs last month, but how does that compare to other dollar rallies?

The most important measure of the US dollar’s exchange rate from a macroeconomic point of view is a measure adjusted for inflation that is weighted according to trade flows.  The Federal Reserve tracks a real broad trade weighted measure of the dollar.

The measure of the dollar had peaked in March near 94.85.  It backed off to almost 93.25 in May, but rose in June and July.

Composed on Bloomberg, this graph shows the Fed’s real broad trade weighed dollar rose to new multi-year highs last month, poking through 95.50.  This is the strongest reading since March 2009.  It set its record low four years ago last month at 80.50. The dollar has risen a little more than 18% off that low. 

How does this compare with the two other significant dollar rallies?  The first significant dollar rally since the end of Bretton Woods (August 15, 1971 Nixon severed the last link between gold and the dollar) began in 1978, but is often associated with the policy mix of Reagan and Volcker.  The real broad trade weighed measure of the dollar rose almost 53%.

The second dollar rally began in mid-1995 and is associated with the tech boom/bubble of during the Clinton presidency.  That rally carried the real broad trade weighted dollar index up nearly 35%.

If this Obama dollar rally eventually matches the magnitude of the Clinton dollar rally, the real broad trade weighted dollar, it will reach about 108.00.  The peak during the Clinton dollar rally was almost 113 in February 2002.  When it peaked, the euro was trading near $0.8700, having bottomed in October 2000, with the help of coordinated central bank intervention, near $0.8230.

The dollar’s exchange rate is a variable in the Fed’s policy making equation, but the coefficient is typically small, unless the move is exceptionally large as it was in Q1.   Exports are relatively modest as a percentage of GDP.  Below 15% of GDP, the share is lower than in most of the other high income countries.  The best thing for US exports, if that is the focus, is stronger world demand.   Fed officials have noted that part of the reason the dollar has appreciated is that investors are anticipating a rise in US rates.  Officials have also attributed the dollar’s rise to the superior US economic performance.