ICE U.S. Dollar Index

Chart of the Week for July 31 - August 6, 2009

The chart above illustrates the changes in the level of the ICE U.S. Dollar Index during the decade ending July 29, 2009. The ICE U.S. Dollar Index is calculated by geometrically averaging the U.S. dollar exchange rates for six component currencies: euro, Japanese yen, British pound, Canadian dollar, Swedish krona, and Swiss franc. This index thus reflects the global buying power of the U.S. dollar.

According to the chart, the U.S. dollar has declined substantially from its ten-year highs in 2002. Several reasons have been put forward to explain the dollar's slide. A large trade deficit throughout the early 21st century caused more dollars to leave the country than to enter it, since imports greatly exceeded exports. Additionally, the Federal Reserve kept interest rates low during much of the period illustrated above, which may have deterred foreign investors from buying U.S. dollars, since they offered a relatively low return.

More recently, the past twelve months have been a rollercoaster ride for the dollar. During the second half of 2008, the dollar dramatically appreciated in value compared to the six currencies that make up the ICE U.S. Dollar Index. This may have been have been the result of a "flight to safety" in the form of an increased demand for U.S. Treasury securities. However, in the most recent 3-6 months, the dollar began to decline again. Some commentators have found a silver lining in this decline, seeing it as a sign that the global recession is abating and investors are more willing to increase their exposure to riskier currencies.

This illustration was compiled by information from outside sources. These companies are not affiliated with ICMA-RC. This information is being provided for educational purposes and is not intended to be construed as or relied upon as investment advice. ICMA-RC does not offer specific tax or legal advice. Individuals are advised to consider any new investment strategies carefully prior to implementing.

Investment information can change rapidly and the changes can be significant particularly in volatile markets. For this reason “as of”’ dates are provided for specific data where applicable. The information should not be considered current after the dates provided.

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