Value of Dollar Surges

The value of U.S. agricultural exports thus far this year is running ahead of last year’s record level. And the growth has occurred despite the rapid appreciation in the value of the U.S. dollar. The Economist reports the U.S. currency is at its highest level in 20 years. Typically, there is an inverse relationship between exports and commodity prices and the value of the dollar. A higher-valued dollar makes U.S. goods more expensive for importing countries, dampening U.S. exports and commodity prices. A lower-valued dollar has the opposite effect.

Many factors influence the value of the dollar. Supply and demand for products, international trade and investment, global inflation and interest rates, economic conditions, and market sentiment are all factors. This year the relative strength of the U.S. economy against other economies and the Federal Reserve’s increase in interest rates have factored into the appreciating dollar. Rising interest rates make investment in the U.S. more attractive spurring a demand for the dollar. Moreover, global investors are turning to dollar-based assets seeking a safe haven amid global financial turmoil.

Figure 1 shows the appreciation of the dollar against the currencies of Nebraska’s largest customers for agricultural goods over the 18-month period beginning January 2021. The dollar’s gain has been minimal against the currencies of Canada (dollar-3 percent) and Mexico (peso-4 percent) but has been more substantial against the currencies of Japan (yen-45 percent) and South Korea (won-25 percent).

Figure 1. Change in Value of U.S. Dollar vs. Other Currencies (Jan. 2021-July 2022)

Source: NEFB graphic based on USDA Economic Research Service data

Changes in the value of the dollar, though, do not affect all commodities the same. Key import markets differ for each commodity. So, effects on commodities differ depending on the exchange rate of the dollar to importing countries currencies. To illustrate, Figure 2 plots changes in trade-weighted currency indices for Nebraska’s primary exports (corn, soybeans, and beef) along with the overall index for U.S. agricultural exports. Commodity trade-weighted indices, developed by the USDA Economic Research Service, provide a sense of the dollar’s value relative to major importing countries of the commodity. As Figure 2 illustrates, the dollar’s rise has most affected beef which has seen an appreciation in its trade-weighted index of 19 percent, and less so for soybeans, whose index has appreciated 16 percent. The growth in the beef index is reflective of the dollar’s rise against the currencies of South Korea and Japan, both large beef importers. The dollar has experienced less appreciation against the Chinese yuan, a large soybean importer, thus, the soybean index has seen less growth.

The impact of the rising dollar on U.S. agricultural exports has been muted thus far. However, adjustments in monetary policies and economic conditions among countries will mean changes in exchange rates between the dollar and foreign currencies. These changes could impact purchases of U.S. agricultural goods and could be a headwind for Nebraska agricultural exports in the coming months.

Figure 2. U.S. Commodity Trade-Weighted Exchange Rate Indexes

Source: NEFB graphic based on USDA Economic Research Service data