When considering the impact of changing currency prices on an economy, trade-weighted measures are appropriate.  The Federal Reserve has cited the dollar’s appreciation as a headwind on the economy and a depressant on prices.
Given the moves in the spot market, and proximity of the G20 meeting, it may be useful to review what has happen to the trade weighted measures of the major currencies. The data is from the Bank of England.  It calculates the trade-weighted indices are a broad range of currencies, and updates on a daily basis.  It is readily available on Bloomberg, from where the charts are composed.
The first Great Graphic shows three currencies (all on a single scale).   The US dollar is the yellow line at the top of the chart. Sterling is the white line and the euro is depicted by the green line. The trade-weighted dollar had a big run up that lasted about three quarters through Q1 15.  It moved broadly sideways until the middle of last October when it trended higher again.  A new cyclical high was seen at the end of last month, which was about 2 percentage points above the March high. However, this month, the dollar’s trade-weighted index has fallen by as much as 4.5%.  It is still off 3.5% and is at level since in the second half of October.
In terms of Fed policy, the decline in the dollar’s trade-weighted index reduces significance for monetary policy.  The bar to a March hike is high and even another strong employment report and the recovery in economic activity to above trend here in Q1 are unlikely to spur a follow-up hike. Â
The Bank of England’s broad trade-weighted sterling index is the white line.  What is not captured in the chart is that on this metric sterling appreciated a little more than 22% from March 2013 to August 2015.  This may help explain some of the disinflationary forces in the UK and the deterioration of its trade balance.
