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Why use the Exchange Rate Data Set?
What is the source of the exchange rates?
When would I use a bilateral exchange rate?
What is an effective or trade-weighted exchange rate?
What is a real exchange rate?
How has the Agricultural Exchange Rate Data Set evolved?
What do the exchange rate indexes tell us?

Q. Why use the Exchange Rate Data Set?

The creation of the Agricultural Exchange Rate Data Set was undertaken to answer several important questions. Given the critical role of the U.S. dollar as an international reference currency, no single exchange rate properly defines the relative value of the U.S. dollar in trade. The U.S. dollar's relative weighted value can vary substantially depending on the composition of trade in a particular commodity or commodity group. For instance, the real tobacco exchange rate was more than twice the value of the real wheat exchange rate in 1970. These differences come about because of the very different country composition of trade in tobacco and wheat. Using the same measure to understand our changing competitiveness would provide an inaccurate picture of what has taken place over time. It is hoped that by expanding the set of agricultural exchange rates, a more accurate picture for a broader base of commodities can be obtained.

Q. What is the source of the exchange rates?

All non-European exchange rates are taken from the International Financial Statistics of the International Monetary Fund. Exchange rates for countries participating in the European Monetary Union are obtained from the Board of Governors of the Federal Reserve System. The exchange rate for the New Taiwan dollar is obtained fromIndustry of Free China, published by the Council for Economic Planning and Development, Taiwan. Data from Pacific Exchange Rate Service are used for the most recent 2 months and are replaced with data from these other sources once they are available.

Q. When would I use a bilateral exchange rate?

If one is interested in knowing the changing market situation in a particular country, a bilateral rate provides an accurate picture of what is taking place. For example, analyzing changes in the yen-U.S. dollar exchange rate helps explain changes in U.S. beef exports to Japan. If the dollar's value rises against the yen, the price of U.S. beef to Japanese consumers would increase (assuming pass-through by marketers) and imports from the United States would likely decline. Looking at only the nominal changes in exchange rates can be misleading. Inflation can vary considerably from country to country. For instance, a number of countries in South America had periods of inflation in the 1980s and early 1990s of several thousand percent a year. A real bilateral exchange rate adjusts for differences between rates of inflation between other countries and the United States by using the relative changes in Consumer Price Indexes (CPIs). This gives a more accurate measure of what is actually taking place in relative currency values.

Q. What is an effective or trade-weighted exchange rate?

Determining the "value" of the U.S. dollar becomes more complex when considering overall U.S. commodity or agricultural exports because there are few instances in which a commodity is exported only to a single country. For this, the analyst needs a measure of value that accounts for how the U.S. dollar is performing against the currencies of many countries-an effective effective or trade-weighted exchange rate. This measure of value is constructed by taking weighted averages of bilateral exchange rates and combining them into a single index. The countries and the weighting scheme would depend on the market (commodity) being examined and the issue being raised.

In the ERS exchange rate data set, a fixed-weight scheme is used, with the weights calculated as 3-year averages (2003-05). For market indexes, the weights are the shares of U.S. exports during the 2003-05 period for a particular commodity or category. For the competitors' indexes, weights are country shares during the 2003-05 period of world exports (excluding U.S. exports) for a particular commodity or category. For suppliers' indexes, weights are country shares during 2003-05 of U.S. agricultural imports for a particular commodity or category.

The real exchange rate indexes are calculated by multiplying the U.S. dollar exchange rate by the ratio of consumer price indexes in the United States and the foreign country. This real rate is then divided by its 2005 exchange rate to form an index. Next, its share of trade in the particular commodity category multiplies each country's real exchange rate (now in index form). The final step is to sum all of the weighted rates across countries to get that commodity's indexed exchange rate. In this way, countries with larger trade shares play a more important role in determining the overall trade-weighted index. Click here for an example of how trade-weighted exchange rates are derived.

Q. What is a real exchange rate?

A consideration when looking at "value" is determining what the U.S. dollar will really buy. Here the answer depends partially on inflation rates in the trading countries. Economists take account of different inflation rates between trading partners by calculating real exchange rates. Real exchange rates depend on two factors-the change in the market value of a currency and the difference in inflation rates between trading partners. Consider a 2-percent change in the real agricultural market value of the U.S. dollar. That change is made up of nominal changes in exchange rates times differences in inflation rates between the United States and the basket of foreign agricultural markets weighted by the relative value of their imports of U.S. agricultural products.

Q. How has the Agricultural Exchange Rate Data Set evolved?

Since 1988, ERS has published measures of the U.S. dollar's real value through a set of indexes focused on world agricultural markets. The original set covered agricultural products in total, as well as wheat, corn, soybeans, and cotton. These exchange rate indexes covered both customer and competitor currency values. In 2005, ERS added more categories, including bulk, intermediates, produce and horticulture, and high-value processed products. In addition, a new group of indexes based on imports into the United States. was added (U.S. suppliers). All of these indexes are available on a monthly basis beginning in January 1970 (the original set of indexes began in 1976).

Q. What do the exchange rate indexes tell us?

All indexes are constructed so that an upward movement indicates a rise in the U.S. dollar's value (an appreciation) and a subsequent loss of price competitiveness for U.S. exports or a relative reduction in import prices. The extent of the actual change depends on how much of the rise (fall) an exporter or importer is willing to pass on to customers. Often, an appreciation of the U.S. dollar or a depreciation of importer currencies relative to the U.S. dollar will result in reduced prices on imported products.

A loss in U.S. competitiveness can occur even without a rise in the U.S. dollar against market currencies. This is because agricultural exports from U.S. competitors are generally priced in U.S. dollars. Thus, if competitor currencies depreciate against the U.S. dollar while market currencies do not, the United States would lose competitiveness against other suppliers to foreign markets. For example, U.S. price competitiveness in the world poultry market apparently improved when the market-based dollar declined 4.5 percent in 1996/97. But, because the U.S. dollar also appreciated 13 percent against competitor currencies during the same period, competitors could cut their U.S. dollar export prices by up to 13 percent and not impact their home currency-denominated profits. If they cut U.S. dollar prices 10 percent, U.S. relative price competitiveness declines 10 percent. At the same time, home currency-denominated profits would still rise about 3 percent.

Last updated: Tuesday, December 23, 2014

For more information contact: Kari Heerman