Indexes of the Foreign Exchange Value of the Dollar

At the end of 1998, the staff of the Federal Reserve Board introduced a new set of indexes of the foreign exchange value of the U.S. dollar.1 The staff made the changeover, from indexes that had been used since the late 1970s, for two reasons. First, five of the ten currencies in the staff’s previous main index of the dollar’s foreign exchange value were about to be replaced by a single new currency, the euro. Second, developments in international trade since the late 1970s called for a broadening of the scope of the staff’s dollar indexes and a closer alignment of the currency weights with U.S. trade patterns. Exchange rate indexes aggregate and summarize information contained in a collection of bilateral foreign exchange rates. Choices concerning the exchange rates to include, the formula to use in combining the component exchange rates into a single number, and the weights to assign the exchange rates in an index all depend importantly on the objectives of the index. The main objective of the staff’s current indexes is to summarize the effects of dollar appreciation and depreciation against foreign currencies on the competitiveness of U.S. products relative to goods produced by important trading part­ ners of the United States. The staff also uses some of the indexes—those that track the dollar’s moves