Unfair Competition with Exchange Rates

On September 15, 2015 I wrote about exchange rates and said they were wild and crazy, like Steve Martin. I looked back over my previous posts and I have quite a few aimed at exchange rates and exchange rate policy. So for those of who are retired or simply bored I encourage you to spend a day or two memorizing all that stuff. My main reason for mentioning those past pieces is that they have a lot of background about exchange rates that I will avoid today as I focus on exchange rate data. 

My reason for writing about the data is that the word data sounds cool. Data this data that. Data is almost as cool as heteroscedasticity. But nevermind all that. Data is full of stories. Data without good statistical analysis means little but it can make you think. 

One thing we hear over and over these days is how China and many other countries take advantage of the USA when they depreciate their currencies. When other countries depreciate their currency that action appreciates the dollar and makes our exported goods less competitive. The story goes on that we have to shut down factories, fire workers, and make widows sew undergarments for Donald Trump.  Of course, the impacts of an appreciating currency are not that simple, but politicians like simplicity.

Today, instead, I share some data on this story about the appreciation of the US dollar. First, I will describe the data. I am using six key exchange rates for this analysis. The first five are well-known and are expressed as how many of the following currencies one can get with one dollar – European euro, Japanese yen, Canadian loonie, Mexican peso, and Chinese yuan. No offense to the Swiss or Brits, but I wanted to keep this manageable and I think the currencies I chose are the main ones for the dollar. A sixth exchange rate is a trade weighted index of the dollar evaluating it against a very broad group of currencies. Think of  TW as indicating how the dollar is doing against the currencies of nearly all our global trading partners.

So one decision I made was to choose these six exchange rates. A second decision related to examining changes over time. Did the dollar appreciate? The answer depends on the time period for the comparison. So here is what I decided. First, my data starts in 1999 – the starting year for the euro currency. Second, I eyeballed the data and decided that there were turning points in many of these currencies at or near the beginnings of 2005, 2008, and 2015. I agree, the results might have turned out somewhat different if I had chosen different dates. Third, I chose to use the data in January of those years. My table compares the April values of the exchange rates in 2016 to the January values in 1999, 2005, 2008, and 2015. All the data came from  https://research.stlouisfed.org/fred2/graph/

Check out the table below. The top half of the table has the actual exchange rates. Reading across the first line you can see the value of the dollar in January of 1999. In January of 1999 one dollar could purchase 86 euro cents. That dollar could also get 113 yens, 1.52 loonies, 10.13 pesos, or 8.28 yuans. The index number for what a dollar could buy in terms of a large number of currencies was 114.47. The second line shows you what the dollar could buy in January 2005. The fifth line shows you similar information for April 2016.

Let’s now use that information to see how the dollar has fared. Take the long haul first. Let’s look at the last column which contains information about the TW, the trade weighted value of the dollar. It was 114.47 in 1999 – 17 years ago. Some of you were mere children 17 years ago. In those 17  years the TW dollar value went to 119.5. In those 17 years the dollar appreciated by 4.4%.

This 4.4% increase in the value of the dollar against most of the world’s currencies supports the notion that the dollar appreciated. The question is what you make of that information. If we divide 6.6% by 17 years we could say that the dollar appreciated by an average of 0.3% per year. If we compare that 4.4% change over 17 years to changes in GDP or inflation or your waistline, you would conclude that 4.4% is not a huge issue. Or think about how much US firms might be impacted by the 4.4% increase in the dollar. Suppose those firms raised their prices by a total of 4.4% over the course of 17 years. Is that enough to convince you that those firms became less competitive? Were they forced to shut down because of this 4.4%? Is this a red herring so that politicians can protect us against evil beasts lurking in dark forests?

So you ask – Larry what in the Hades is this TW thing? Let’s instead talk about that evil monster China. Hmmm – how much did the dollar appreciate against the Chinese currency? The chart shows that a dollar could get you 8.28 yuan in 1999 and 6.5 yuan in 2016. That is NOT an appreciation of the dollar. The dollar fell against the yuan by 21% since 1999. Looking down the China column in the bottom half of the chart shows that the dollar has fallen against the yuan since 1999, since 2005, and since 2008. Only if you measure over the last 15 months can you see the dollar rising against the yuan – by less than 5%.

One more calculation -- how the dollar fared during the 11 year period between 2005 and 2016. The dollar appreciated at roughly a 5% to 9% clip against the Yen, the Loonie, and against our major trading partners. It is up 16% against the Euro, up 58% against the Peso, but down 21% against the Yuan. Much of that occurred after it became known that the financial crisis was spreading from the US to the rest of the world. As those countries are recovering and showing more stability today there is less need for the dollar to provide cover.  

Since I am running out of JD and your patience, I will end with this. The dollar is not greatly appreciating against anything in general. It is clearly rising in the last 15 months, except against the yen. But that increase is smaller than the increases that occurred right after the global recession spread. Further, if you look at the value of the dollar today you see some very different stories from country to country. 

The dollar has appreciated greatly against the Mexican peso while mostly depreciating against the Chinese yuan. If you want to find stories explaining subpar US growth and employment I suggest you look beyond exchange rates. There is no clear story here. More than likely the dollar strength reflects the weaknesses in other countries.  If and when the rest of the world stabilizes the dollar will return to a lower level. I doubt that political attacks on our trading partners will do much to normalize the dollar. 

Table. US Dollar Value Relative to Selected Currencies, 1999 to 2016

Date Euro  Yen Loonie Peso China TW 1999 0.86 113.29 1.52 10.13 8.28 114.47 2005 0.76 103.34 1.22 11.26 8.28 109.58 2008 0.68 107.82 1.01 10.91 7.24 98.65 2015 0.86 118.25 1.21 14.70 6.22 112.77 2016 0.88 108.07 1.30 17.76 6.50 119.50 Percent Change  to 2016 since 99 2.0 -4.6 -14.4 75.4 -21.5 4.4 since 2005 15.5 4.6 6.1 57.7 -21.5 9.1 since 2008 29.6 0.2 28.7 62.9 -10.2 21.1 siunce 2015 2.3 -8.6 7.2 20.9 4.5 6.0 Note: Exchange rates are foreign currency units per dollar in January of each year The quote for 2016 is April of 2016.