I recently wrote a piece for Industry Market Trends about how U.S. manufacturing could be affected by the rising U.S. dollar — see “Rising U.S. Dollar Could Put a Damper on Manufacturing Exports.”
In my original story, I included a brief primer on what is meant by a “strong” or “weak” currency. My editor didn’t think our readers needed to know about that, but I found it hard to track down a coherent explanation of this, so I just wanted to publish here some very basic information about a topic that I found confusing. Here’s what I originally wrote:
On the face of it, one might think a “strong dollar” is a positive thing. Strength is good, right? Higher value is good, right? But that’s not necessarily the case in the world of foreign exchange. When we talk about the rising dollar, we mean that it is rising in value, or getting stronger, against other currencies.
For example, as of this writing, one U.S. dollar (USD) buys about 98 Japanese yen (JPY). In 2011, one USD was worth about 76 JPY. The dollar now buys more JPY than it did in 2011, so we would say it is stronger. However, ten years ago, the dollar was at about 110 JPY, so you could say that long-term the USD is weak against the yen.
The U.S. dollar is also measured by the U.S. Dollar Index (USDX), which is a “basket” of foreign currencies, including the Euro (EUR), the JPY, the British pound sterling (GBP), the Canadian dollar (CAD), the Swedish krona (SEK) and the Swiss franc (CHF). As of this writing, the USDX is between 81 and 82. Ten years ago, it was around 104, which means that long-term the dollar is weaker. However, in 2011, the USDX stood at around 70, so that the more recent trend is a rising dollar.
The IMT article goes on to explain how a rising dollar can affect manufacturing by making exports from the U.S. more expensive in other countries.
— ARB, 30 July 2013