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:
Euro 57.6%
Yen 13.6%
Pound 11.9%
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.
3 comments:
I read the USDX over at http://www.nybot.com/education/brochuresPublications/files/USDX.pdf
and think that one of the reasons China is not includes is found in the definition of what goes into the basket of currencies, ".. and have well-developed foreign exchange markets with rates freely determined by market participants. "
Reading through the USDX overview it states that if based its weightings on the Federal Reserver Board's trade wieghted index. I found that the FED index is The Atlanta Fed index is based on 1995–97 bilateral trade weights for 15 currencies. Found at
http://www.frbatlanta.org/invoke.cfm?objectid=AE552D8D-5056-9F12-12C0FBD1AD41A359&method=display_pressrelease
It sure seems to me the while the NYBOT claims to be based on the FED's dollar index, it does not accurately represent the US trading partners. In 1998 the FED changed its index to more accuratley reflect the changes the US trade balance and the see http://www.federalreserve.gov/pubs/bulletin/2005/winter05_index.pdf
for the data.
It seems to me that the NYBOT dollar index is based on the Group of 10 (G-10) index.
The FED had the following to say about the use of the G-10 index
The multilateral trade-weighted index of the foreign exchange value of the U.S. dollar against the currencies of the other countries in the Group of Ten (G-10), developed at the Federal Reserve Board in 1971, has played an important role in staff analysis of foreign influences on the U.S. economy for more than twenty-five years.(1)
Here is the Group of 10 list
http://www.imf.org/external/np/exr/facts/groups.htm#G10
Kinda looks like the list of countries the NYBOT dollar index uses.
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