Magazine article The International Economy

On the Dollar Exchange Rate

Magazine article The International Economy

On the Dollar Exchange Rate

Article excerpt

"Comparing the current exchange rate with the 100 yen per dollar in 1995 is misleading because of differences in U.S. and Japanese inflation. Between 1995 and 2007, consumer prices rose 37 percent in the United States but remained virtually unchanged in Japan (a decline of less than 1 percent). A dollar buys substantially less in the United States today than it did in 1995 while 100 yen buys the same amount in Japan as it did then. Since it takes $1.37 in the United States today to buy what a dollar bought in 1995, the yen would have to strengthen to 73 yen per dollar (i.e., 1 divided by 1.37) to cause a dollar to buy the same amount in Japan as it did in 1995."

"It is wrong, moreover, to read much into the dollar's recent rapid decline. The value of the dollar, like other asset prices, fluctuates substantially from year to year. But over long periods of time the dollar's real value has changed very little. …

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