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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 from Industry 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.
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