Data and methodology

To maintain its trade-weighted dollar index (http://www.federalreserve.gov/releases/H10/Weights/), the Federal Reserve must keep track of the changing use of various currencies the U.S. receives in return for its exports and pays for its imports. In these charts, export weights are depicted in blue and import weights in green.

These weights are calculated on an annual basis and, of necessity, after the fact. Because the Federal Reserve is unable to license its dollar index for commercial purposes, many traders are unfamiliar with this data.

Also, these currency weights reflect their use in bilateral trade with the U.S. and do not reflect total bilateral trade. This is critical for countries from whom the U.S. imports large quantities of goods priced in dollars, such as crude oil and various metals.

Annual data are of little trading use in a continuous market such as currencies. We can create smoothed series of import and export weights via a statistical technique called “cubic spline interpolation”.

This technique is used twice in the charts below — once to create quarterly series from the annual numbers and a second time to create monthly numbers from the quarterly results.

The resulting interpolations are far easier to absorb than the annual numbers, but as they involve two separate data transformations, we did not attempt any further statistical analysis against monthly currency values (presented in red in the charts). In addition, please be advised all currencies are displayed in the “USD per” convention familiar to traders of the euro, the British pound, and currency futures. The currency scale is inverted for currencies commonly expressed as “per USD,” so a rising red line always conveys strength vs. the dollar and a falling red line always conveys weakness.

Over the past 35 years we have seen the extinction of the euro’s precursors and a number of disappearing currencies in countries such as Brazil and Argentina, both of whom continuously fail to manage their affairs. We also see the effects of various currency boards, direct pegs to the dollar, managed floats, trade blocs, and new currencies coming on to the scene.

Currencies are dynamic entities; they come and go, and even when they persist they represent nothing in the way of fixed purchasing power. The U.S. dollar, still the lynchpin of the global economy, has lost 79.68 percent of its purchasing power since the December 1971 Smithsonian Agreement began the floating exchange rate era.