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