Financial Update (Fourth Quarter 2006)
Did You Know?
Dollar Index Charts Value of U.S. Currency
History of the index
The Atlanta Fed originally constructed the index in 1986 to analyze developments in foreign exchange markets and estimate the impact of the dollar's movements on U.S. international trade. In 1999, with the creation of the European Monetary Union and the introduction of the euro, the index underwent a major revision, adding trading partners and updating country weights. Today, the current Atlanta Fed index is based on 1995–97 bilateral trade weights for 15 currencies. It uses 1995 as a base year because several countries that experienced significant inflation in the early 1990s had begun to reduce inflation by 1995.
The importance of other countries' currencies to U.S. trade determines how weights are assigned to those currencies. The weighting is proportional to the amount of trade the United States does with each country in the index. Therefore, movements in the currencies of larger trading partners have more significant effects on the overall index than the currency movements of smaller trading partners.
Regional tracking available
The Atlanta Fed Dollar Index also reports on four subindexes: Americas, Europe, Pacific, and Pacific-excluding-Japan. These subindexes show changes in the dollar's value against those regions' various currencies. According to the current weights, the Americas and the Pacific subindexes each represent 38 percent of the total index, the Europe subindex accounts for 23 percent, and oil-exporter Saudi Arabia accounts for 1 percent of the total index. A rise in the index or subindex reflects a strengthening of the dollar against that region's currencies.
The Atlanta Fed index is calculated on a daily basis and can be updated as soon as the exchange rate data become available. This information is published within hours of its certification by the Federal Reserve Bank of New York. However, the Atlanta Fed only publishes the index on a monthly basis.
Ups and downs of the Dollar Index
The Atlanta Fed Dollar Index rose steadily between 1995 and 2001 but has been on a downward trend since. In the first nine months of this year, the trade-weighted value of the dollar declined 3 percent as the dollar depreciated against most major currencies except for the Japanese yen and the Mexican peso.