In some cases, the issuers of these currencies also have bilateral swap lines with the Federal Reserve. This, it can be argued, creates confidence that their currencies will hold their value against the dollar.
A more plausible explanation is that these nontraditional reserve currencies are issued by countries with open capital accounts and track records of sound and stable policies. Important attributes of reserve currency issuers include not just economic weight and financial depth, but also transparent and predictable policies. In other words, the stability of the economy and policy decisions matter for international acceptance.
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IMFBlog is a forum for the views of the International Monetary Fund (IMF) staff and officials on pressing economic and policy issues of the day.The IMF, based in Washington D.C., is an organization of 190 countries, working to foster global monetary cooperation and financial stability around the world.The views expressed are those of the author(s) and do not necessarily represent the views of the IMF and its Executive Board. Read More
J.P. Morgan Research remains bearish on the euro, especially if the European Central Bank (ECB) cuts interest rates sooner than the Fed. This will widen the interest rate gap between the U.S. and the Eurozone, putting downward pressure on the euro against the dollar.
While the BoJ ended its negative interest rate policy in March, the market impact of this historic move was modest overall. On the back of the announcement, yen depreciation accelerated and USD/JPY adhered to a tight range of 151-152 for several weeks.
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The value of a currency is an important determinant for prices in international trade. When the value of a currency changes, prices for goods traded using that currency can be affected. A currency appreciation (when the value increases over time) results in a lower effective price for imported goods; currency depreciation (when the value decreases over time) translates to higher import prices. By and large, firms across the world have adopted the relatively stable U.S. dollar as their preferred currency for import and export transactions. But shifts in U.S. dollar exchange rates with many other currencies shook up international trade prices in 2022. This Beyond the Numbers article will discuss how interest rate increases affect the value of the U.S. dollar and the consequences on import and export prices and consumers. The article will also examine certain world currencies, the housing market, and commodities.
You may be wondering, what is the upshot? Broadly, a currency appreciation in the United States means that one dollar can now buy more of a good valued in a foreign currency. Accordingly, as the dollar strengthened, import consumer goods prices fell. Consumer goods prices declined 0.5 percent from April to June 2022 when the dollar started to rise, then rebounded slightly with a 0.3-percent rise from June to August 2022 when the dollar briefly leveled. Prices for consumer goods then declined, falling 0.4 percent from August to December 2022 as the dollar strengthened and subsequently weakened, even as the FOMC continued increasing interest rates.
Capital goods prices were also influenced by the appreciating dollar, though more mildly than consumer goods prices.4 The impact was slower to unfold, as long-term contracts are more prevalent with capital goods purchases. Import capital goods prices remained unchanged by the stronger dollar until May 2022, then advanced a mere 0.5 percent from May to December 2022 as supply chain constraints continued to hinder production capabilities in the sector.
Though the effect is indirect, rising U.S. interest rates and the subsequent increase to both consumer and manufacturing costs can impact the demand for petroleum products as well. If the overall cost of living increases, consumers may elect to forgo travel and other cost-prohibitive activities as affordability drops even further. Likewise, rising interest rates could impact the amount of petroleum demanded by manufacturers, because the cost of producing and transporting goods will be higher.
Furthermore, oil exporters often price their product in U.S. dollars, which means a stronger dollar can make oil effectively more costly for importers using a different currency, resulting in a demand decrease. Prices for U.S. import petroleum fell 37.3 percent from June to December 2022.
Interest rate hikes also dampened activity in the U.S. housing market. Rising mortgage rates in 2022 increased the cost of borrowing money, which in turn reduced demand for loans from potential home buyers. At the same time, U.S. homebuilding declined, falling 8.8 percent for the year ended October 2022.5 Single-family housing starts, accounting for the largest share of homebuilding, decreased to the lowest level since May 2020. From a recent peak in March 2022 to the end-of-year data from December 2022, prices for selected building materials imports decreased 21.4 percent.
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4 Capital goods and consumer goods are end-use classifications that identify goods based on principal end-use rather than the physical characteristics of the merchandise. For more information, see -reach/2012/03/end-use-trade-term-of-the-month-2.html.
U.S. export prices experienced a major decline in 2015, as evidenced by the Bureau of Labor Statistics (BLS) export price index. Prices for U.S. exports, published in dollar terms, decreased 6.6 percent in 2015, the largest calendar-year decline since the index was first published in 1983. However, the large decline in the U.S. dollar export price index did not tell the entire story. When measured in foreign currency terms, export prices were actually higher because of the strong dollar. The value of the dollar strengthened against the euro, Japanese yen, Chinese yuan, and Canadian dollar. Continued slow global economic and trade growth dampened demand for U.S. exports and influenced U.S. export price trends. The meeting of the strong dollar and lackluster demand for U.S. exports was particularly challenging for the U.S. agricultural industry. This Beyond the Numbers article analyzes what impact the strengthening dollar had on certain agricultural commodities.
As seen in chart 1, the U.S. dollar export price index diverges from the foreign currency export price index. U.S. export prices in dollar terms fell 6.6 percent from December 2014 to December 2015 while the price index for U.S. exports in foreign currency terms rose 4.2 percent. This divergence is explained by the trade-weighted U.S. dollar index. The trade-weighted U.S. dollar index is a weighted average of the foreign exchange value of the U.S. dollar against the currencies of the group of major U.S. trading partners. The foreign currency-based export price index is derived by multiplying the U.S. dollar-base price index by the trade weighted U.S. dollar index and dividing by 100. Even though export prices fell in U.S. dollar terms, they rose in foreign currency terms because the value of the U.S. dollar advanced 11.6 percent against the currencies of its main trading partners. Faced with the prospect of lower demand, and their unwillingness to jeopardize competitiveness and market share, many U.S. exporters lowered the price of their products to minimize the impact of the stronger U.S. dollar. 152ee80cbc
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