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July/August 1996, 
Vol. 78, No. 4
Posted 1996-07-01

A Question of Measurement: Is the Dollar Rising or Falling?

by Cletus C. Coughlin and Patricia S. Pollard

Trade-weighted exchange rate indexes that measure changes in the average foreign exchange value of the U.S. dollar produce different answers to how much the dollar has changed and, in some cases, even whether the value of the dollar has risen or fallen. After discussing the differences in constructing these indexes, the authors examine some factors that might account for the contrasting views of changes in the dollar. Their analysis uses two indexes—one produced by the staff of the Board of Governors and the other by the Federal Reserve Bank of Dallas. These indexes differ in three aspects: the method used to calculate the trade weights, the base period for the trade weights, and the foreign currencies included. Their comparison reveals that the difference between the two indexes is driven primarily by the choice of the currencies.