In recent days, the "collapse" of the US dollar has been getting some headlines. A benchmark of the dollar is called the Dollar Index. It is an index created by the New York Board of Trade. It takes a basket of currencies and compares them to the US dollar. These currencies are "weighted", i.e. some have more effect than others on the index.
The currencies, and their respective weightings are:
CAN dollar 9.1%
Swiss Franc 3.6%
Swedish Krona 4.2%
In theory, the NYBOT dollar index is trade weighted. That is to say the percentage of importance on the dollar index is a reflection of trade with America.
Well, I decided to look up the actual trade figures for last year, 2005.
Here's what I found.
- America's biggest trading partner was Canada. Almost $471 billion.
- America's second biggest trading partner was China. About $281 billion.
- All of Euro based Europe was somewhere over $300 billion.
Since the Euro makes up 57.6% of the index, one would think that we are doing a lot of trade with Europe. In fact, only about 11 or 12% of US trading activity is with (Euro) Europe. Canada, despite being weighted at 9.1% actually partners in 17% of US trade.
China isn't on the index. Neither is Mexico, which did over $270 billion in trade with the US. Korea and Taiwan combined did over $124 billion in trade. Also, you guessed it, NOT on the index.
Sweden and Switzerland, who make up 7.8% of the index did less than $39 billion last year, combined. That is a meagre 1.4% of US trade.
Perhaps the headline dollar index should be weighted to actual trade, not tied to some ratios that the NYBOT decides is reflective of the strength of the currency.
Bottom line is that headline numbers are often misleading. The dollar has fallen against the Euro and the Pound, but is that so bad, considering most of our foreign trade is done elsewhere? Maybe it hurts Europe more than America, particularly for tourism, airplanes and BMW's. Just a contrarian's view.