Three Methods of Measuring the Dollar's Value

Where Is the Dollar's Value Headed Next?

One dollar bill detail
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The value of the U.S. dollar is measured in three ways: exchange ratesTreasury notes and foreign exchange reserves. The most common method is through exchange rates. You should be familiar with all three in order to understand where the dollar is headed next.

Exchange Rates

The dollar exchange rate compares its value to the currencies of other countries. It allows you to determine how much of a particular currency you can exchange for a dollar.

The most popular exchange rate measurement is the U.S. Dollar Index®.

These rates change every day because currencies are traded on the foreign exchange market. A currency's forex value depends many factors. These include central bank interest rates, the country's debt levels and the strength of its economy. When they are strong, so is the value of the currency. For more, see How Does the Government Regulate Exchange rates?

Most countries allow forex trading to determine the value of their currencies. They have a flexible exchange rate. Find out the dollar's value compared to the rupee, yen, Canadian dollar and the pound in U.S. Dollar Rate.

The following is an example of how the euro measured the dollar's value from 2002 through 2015. For updates, see Euro to Dollar Conversion.

2002-2007 - The dollar fell by 40 percent as the U.S. debt grew by 60 percent. In 2002, a euro was worth $0.87 versus $1.44 in December 2007.

(Source: Federal ReserveExchange Rates)

2008 - The dollar strengthened by 22 percent as businesses hoarded dollars during the global financial crisis. By the year’s end, the euro was worth $1.39.

2009 - The dollar fell by 20 percent thanks to debt fears. By December, the euro was worth $1.43.

2010 - The Greek debt crisis strengthened the dollar.

By the year’s end, the euro was only worth $1.32.

2011 - The dollar's value against the euro fell by 10 percent. It later regained ground. As of December 30, 2011, the euro was worth $1.2973.

2012 - By the end of 2012, the euro was worth $1.3186 as the dollar had weakened.

2013 - The dollar lost value against the euro, as it appeared at first that the European Union was at last solving the eurozone crisis. By December, it was worth $1.3779.

2014 - The euro to dollar exchange rate fell to $1.21, thanks to investors fleeing the euro. 

2015 - The euro to dollar exchange rate fell to a low of $1.05 in March, before rising to $1.13 in May. It fell to $1.05 after the Paris attacks in November, before ending the year at $1.08. 

2016 - The euro rose to $1.13 on February 11 as the Dow fell into a stock market correction. It fell further to $1.11 on June 25. This happened the day after the United Kingdom voted to leave the European Union. Traders thought uncertainty surrounding the vote would weaken the European economy. Later on, the markets calmed down after realizing that Brexit would take years. It allowed the euro to rise to $1.13 in August. Not long after, the euro fell to its 2016 low of $1.04 on December 20, 2016.

 Here are more Brexit Consequences.

2017 - The euro rose to $1.09 in May. Europe began looking like a stronger economic bet after investigations into connections between President Trump's administration and Russia worried investors. (Source: "Dollar Slides to 6-Month Low as Geopolitics Weigh," MarketWatch, May 16, 2017.)

Treasury Notes

The dollar's value is usually in sync with demand for Treasury notes. The Treasury Department sells notes for a fixed interest rate and face value. Investors bid at a Treasury auction for more or less than the face value, and can resell them on a secondary market. High demand means investors pay more than face value, and accept a lower yield. Low demand means investors pay less than face value and receive a higher yield. That's why a high yield means low dollar demand until the yield goes high enough to trigger renewed dollar demand.

Before April 2008, the yield stayed in a range of 3.91 percent to 4.23 percent. That indicated stable dollar demand as a world currency

2008 - The yield on the benchmark 10-year Treasury note dropped from 3.57 percent to 2.93 percent (April 2008-March 2009), as the dollar rose. Remember, a falling yield means a rising demand for Treasurys and dollars.

2009 - The dollar fell as the yield rose from 2.15 percent to 3.28 percent.

2010 - The dollar strengthened, as the yield fell from 3.85 percent to 2.41 percent (January 1-October 10). It then weakened due to inflation fears from the Fed's quantitative easing 2 strategy.

2011 - The dollar weakened in early spring but rebounded by the end of the year. The 10-year Treasury note yield was 3.36 percent in January, rose to 3.75 percent in February, then plummeted to 1.89 percent by December 30.

2012 - The dollar strengthened significantly, as the yield fell in June to 1.443 percent -- a 200-year low. The dollar weakened toward the end of the year, as the yield rose to 1.78 percent.

2013 - The dollar weakened slightly, as the yield on the 10-year Treasury rose from 1.86 percent in January to 3.04 percent by December 31. 

2014 - The dollar strengthened through the year, as the yield on 10-year Treasury fell from 3.0 percent in January to 2.17 percent by year-end.

2015 - The dollar strengthened in January, as the 10-year Treasury yield fell from 2.12 percent in January to 1.68 percent in February. The dollar weakened as the yield rose to 2.28 percent in May. It ended the year at 2.24 percent. 

2016 - The dollar strengthened as the yield fell to 1.37 percent on July 8, 2016. The dollar weakened as the yield rose to 2.45 percent at year end.

2017 - The dollar weakened as the yield rose 2.45 percent. The yield hit a peak of 2.62 percent on March 13. The dollar grew stronger as the yield fell to 2.32 percent on July 27, 2017. (Source: U.S. Treasury, Daily Treasury Yield Curve Rates.)

Foreign Currency Reserves

The dollar is held by foreign governments in their currency reserves. They wind up stockpiling dollars as they export more than they import. They receive dollars in payment. Many of these countries find that it's in their best interest to hold on to dollars because it keeps their currency values lower. Some of the largest holders of U.S. dollars are Japan and China.

As the dollar declines, the value of their reserves also decreases. As a result, they are less willing to hold dollars in reserve. They diversify into other currencies, such as the euro or even the Chinese yuan. This reduces the demand for the dollar. It puts further downward pressure on its value.

As of the fourth quarter of 2016 (most recent report), there was $5.053 trillion in foreign government reserves held in dollars. That's the highest in at least the past year. That's 64 percent of the total measurable reserves. It's down from 67 percent in Q3 of 2008. This decline means that foreign governments are moving their currency reserves out of dollars. At the same time, the value of euros held in reserves increased from $393 billion in 2008 to a record of $1.559 trillion. This occurred despite the eurozone crisis. Nevertheless, holdings in euros are less than a third of the amount held in dollars. (Source: "COFER Table," International Monetary Fund. )

How the Value of the Dollar Affects the U.S. Economy

When the dollar strengthens, it makes American-made goods more expensive and less competitive compared to foreign-produced goods. This helps decrease U.S. exports, thereby slowing economic growth. It also leads to lower oil prices, as oil is transacted in dollars. Whenever the dollar strengthens, oil-producing countries can relax the price of oil, because the profit margins in their local currency aren't affected.

For example, the dollar is worth 3.75 Saudi riyals. Let's say a barrel of oil is worth $100, which makes it worth 375 Saudi riyals. If the dollar strengthens by 20 percent against the euro, the value of the riyal, which is fixed to the dollar, has also risen by 20 percent against the euro. To purchase French pastries, the Saudis can now pay less than they did before the dollar became stronger. That's why the Saudis didn't need to limit supply as oil prices fell to $30 a barrel in 2015. Find out more ways it affects you in The Value of Money.

The Value of the Dollar Over Time

The dollar's value can also be compared to what could have been bought in the United States in the past. Make some comparisons with the past in Today's Dollar Value.

The growing U.S. debt weighs on the back of the minds of foreign investors. That's why, in the long-term, they may continue to little by little move out of dollar-denominated investments. It will happen at a slow pace so that they don't diminish the value of their existing holdings. The best protection for an individual investor is a well-diversified portfolio that includes foreign mutual funds

Dollar Value Trends from 2002 to July 2017

From 2002 to 2011, the dollar declined. This was true with all three measures. One, investors were concerned about the growth of the U.S. debt. Foreign holders of this debt are always uneasy that the Federal Reserve would allow the dollar's value to decline so that U.S. debt repayments would be worth less in their own currency. The Fed's quantitative easing program monetized the debt, thereby allowing an artificial strengthening of the dollar. This was done to keep interest rates low. Once the program ended, investors grew concerned that the dollar could weaken. 

Two, the debt put pressure on the president and Congress to either raise taxes or slow down spending. This concern led to sequestration. It restricted spending and dampened economic growth. Investors were sent to chase higher returns in other countries.

Three, foreign investors prefer to diversify their portfolios with non-dollar denominated assets.

Between 2011 and 2016 the dollar strengthened.  There were six reasons for this:

  1. Investors worried about the Greek debt crisis. It weakens demand for the euro, the world's second choice for a global currency
  2. The European Union struggled to boost economic growth through quantitative easing
  3. In 2015, economic reform slowed China's growth. It pushed investors back into the U.S. dollar.
  4. The dollar is a haven during any global crisis. Investors bought U.S. Treasurys to avoid risk as the world recovered unevenly from the 2008 financial crisis and recession.
  5. Despite reforms, both China and Japan continued to purchase dollars to control the value of their currencies. It helped them boost exports by making them cheaper. 
  6. The Federal Reserve signaled that it would raise the fed funds rate. It did so in 2015. Forex traders took advantage of the higher rates as Europe's interest rates declined. For more details, see What Made the Dollar So Strong?