The Effects of a Stronger Dollar on U.S. Prices

What is the effect of dollar appreciation on US inflation, its imports and exports?

In a new studyFederico J. Díez and Gita Gopinath calibrated the effects to match the 15% dollar appreciation that has occurred since June 2014. What they have found is that the pass-through on imports and consumer prices is relatively modest.

Specifically, a 15 percent dollar appreciation should reduce consumer prices by a quarter of a percentage point in the short run, and by four-tenths of a percentage point after two years.

However, there is a significant effect on US export prices. The findings of this study are consistent with the argument that most of the trade balance adjustment following a dollar appreciation takes place through the export (and not the import) channel. The reason for this is that the U.S. exports and imports are predominantly denominated in U.S. dollars.

Here is another interesting bit:

To put these numbers in historical context, the last time the Broad Dollar Index reached the current high levels was in early 2003, after peaking in 2002. Thus, the current appreciation has taken the dollar’s value to its highest point in over 12 years and is of a magnitude even greater than the appreciation observed during the Great Recession. Beyond the current magnitude reached by the stronger dollar, the speed at which the appreciation took place is also impressive.


In Figure 3 we plot the percentage change in the dollar index in a given month relative to the same month in the previous year. From the figure it is apparent that the current appreciation is not just significantly larger but, in terms of the Broad Dollar Index, is the third fastest in over 30 years, right after the appreciation of January 1998 (during the Asian and Russian crises) and March 2009 (during the last financial crisis).

As discussed in a previous post, imports and exports do not matter very much to the US economy, but a stronger dollar does matter to the S&P 500.

A strong dollar is therefore, a triple whammy:

  1. weaker exports
  2. barely any offset via cheaper imports
  3. negative wealth effects via lower S&P 500 earnings.

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