Measuring the Internatonal Value of the U.S. Dollar

Since early 1973, after more than a quartercentury of relative stability that prevailed under the postwar Bretton Woods international monetary system, the value of the U.S. dollar in terms of foreign currencies has been changing daily. It has been fluctuating in response to the supply and demand conditions in the foreign exchange markets within the framework of a system of floating exchange rates of major currencies. In this environment measuring the "international value" of the dollar has become a somewhat confusing task. Financial pages of newspapers have been periodically headlining a "precipitous drop" in the value of the dollar on certain foreign exchange markets, while at the same time reporting its "strengthening" in others. These events have invariably left interested but "uninitiated" laymen confused as to the "real" international value of the currency. In an effort to contribute to a better understanding of these issues, and in response to many inquiries that the Federal Reserve Bank of Chicago has received on this topic, the following article presents a survey of various measures of the international value of the dollar.