Dollar Creates Headwinds for Exports

The dollar recently hit its highest level in more than a year creating headwinds for U.S. agricultural exports by making U.S. goods more expensive. Global investors continue to look favorably on the U.S. currency because of its role as a haven from global risks, potential higher U.S. interest rates, and the demand for dollars to invest in artificial intelligence. The U.S. dollar index, which tracks dollar’s value against a basket of six major global currencies, has gained more than 3.3% this year building on previous growth this decade. One consequence is a growing trade deficit in agricultural goods for the U.S. beginning in 2022 reaching $41 billion in 2025.

Figure 1 shows changes in the value of the dollar compared to currencies of Nebraska’s largest agricultural customers since early 2021. Apart from the Mexican peso, against which the dollar has depreciated 14.4%, the dollar has appreciated against the currencies of all other key trading partners ranging from 6.3% versus the European Union Euro to 70% gain relative to the Japanese yen. The Economist reported last week the yen hit a 40-year low versus the dollar recently. Fortunately, competitors in global agricultural markets like Brazil and Argentina have seen their currencies appreciate too, partially mitigating the negative effects of the dollar’s rise.

The dollar’s appreciation can also be seen in trade-weight exchange rates for specific commodities. Figure 2 shows trade-weighted exchange rate indexes for Nebraska’s three largest commodity exports (corn, soybeans, and beef) and the overall trade-weighted rate for U.S. agricultural exports. The indexes show the appreciation of the dollar against the currencies of importers of corn (+17%), soybeans (+24%), and beef (+24%). The overall trade-weighted index for agricultural exports has risen 16%.