Suppose the US trades only with Canada, the Eurozone, and China, and the shares of trade with them are 40%, 30%, and 30% respectively. If the US dollar exchange rates with these country currencies a year ago were: 1.1/CAD, 1.35/Euro, and 1.65/Yuan respectively, and currently the rates are 0.95/CAD, 1.45/Euro, and 1.7/Yuan. How has the US dollar fared against a basket of currencies represented by its trade partners' currencies?
1.1/CAD to 0.95/CAD - Appreciation
A year ago $1.1 US = 1CAD but now $0.95 US = 1 CAD so the value of
US dollar has increased as 1CAD gives lesser dollars now than
previous year. Thus the US dollar has appreciated against CAD
1.35/Euro to 1.45/Euro - Depreciation
A year ago $1.35 US = 1Euro but now $1.45 US = 1Euro so the value
of US dollar has decreased as more dollars are needed now to
purchase 1Euro. Thus the US dollar has depreciated against
Euro.
1.65/Yuan to 1.7/Yuan - Depreciation
A year ago $1.65 US = 1Yuan but now $1.7 US = 1Yuan so the value of
US dollar has decreased as more dollars are needed now to purchase
1Yuan. Thus the US dollar has depreciated against Yuan.
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