Great Graphic: Real Broad Trade Weighted US Dollar Index

This Great Graphic, created on Bloomberg, shows the Federal Reserve's real broad trade weighted measure of the dollar.   It clearly shows that the dollar declined between 2000-2010, with the brief, but sharp rally in late 2008 and into 2009.  

This broad measure of the dollar's performance, adjusted for inflation, bottomed in 2011. After recovering a little, it has moved broadly sideways.  

The Federal Reserve updates this index at the end of the month.  The recent nominal price action suggests that this measure has increased. However, the general rule of thumb, given the role of trade in the US economy, that there is roughly a 10 to 1 ratio between the rise of the dollar on this basis, and growth.  

We would caution against exaggerating the near-term increase in the dollar.  In the first eight months of the year, the real broad trade weighted dollar has risen by less than 1%.  Even with the September increase, the appreciation of the dollar at this point will have a negligible impact on the US growth.   

Moreover, the dollar's appreciation may have encouraged lower nominal yields than may have otherwise been the case.  The stronger dollar may impact inflation expectations, which, according to some measures, have fallen over the past month.  The stronger dollar may also compensate some foreign investors who recognize dollar appreciation may be worth more than a higher coupon.  

The best thing for US exports, if that is one's focus, is not so much a weaker dollar, but stronger world growth.  It is also important to remember how corporate America services foreign demand. It does so not primarily by exporting.  Rather, corporate America builds and sells locally, that is abroad.

The sales by majority-owned foreign affiliates of US companies will exceed US exports by a factor of more than four-to-one. For historical reasons, US companies pursued a direct investment expansion strategy rather than the more traditional export-oriented strategy.  And the US is no slouch as an exporter.  It will be around third place in the global league tables, behind China and Germany.