Fact of the Week: The US Dollar Is Up Almost 20% Relative to Other Major Currencies Over the Last Year

Sources: Yahoo! Finance, Currencies, US Dollar/USDX, USD/CNY, USD/GBP, USD/JPY, USD/KRW (accessed September 29, 2022); Markets Insider, United States Dollar – Euro (accessed September 29, 2022); Bureau of Economic Analysis (BEA), International Data (Table 2.1; accessed September 29, 2022); BEA, National Data (Table 1.1.5; accessed September 29, 2022).

Commentary: The ICE U.S. Dollar Index, which measures the value of the dollar against a basket of other global currencies, increased 19.6 percent over the last 12 months and is at its highest level since May 2002. The dollar is trading at its highest level ever relative to the British pound and its highest level relative to the Japanese yen since August 1998, the euro since October 2002, the Chinese yuan since February 2008, and the Korean won since March 2009, according to data from Yahoo! Finance and Markets Insider. Barring a severe global recession, a sustained surge in the dollar’s relative value will exacerbate the United States’ trade deficit, which ballooned to $1.09 trillion (4.7 percent of GDP) in 2021, up from $0.91 trillion (4.3 percent of GDP) in 2020 and $0.65 trillion (4.3 percent of GDP) in 2010, per data from the U.S. Bureau of Economic Analysis. Despite sluggish—or even negative—economic growth in many parts of the world, including two consecutive periods of negative real GDP growth in the United States, the (seasonally-adjusted) U.S. trade deficit totaled $0.65 trillion and 5.2 percent of GDP through June of this year.

The trade deficit fell from the first quarter of this year to the second (from $0.34 trillion to $0.31 trillion) and will do so again from the second to the third. This is thanks to aggressive tightening from the Federal Reserve and suppressed output abroad due to the Russia-Ukraine conflict and its ensuing energy crisis and China’s continuance of its zero-COVID policies. However, despite this overwhelming confluence of factors, the U.S. trade deficit was still 4.9 percent of GDP in the second quarter of this year. Excepting the first quarter of this year, this is the highest quarterly share of GDP for the U.S. trade deficit since the third quarter of 2008.