The dollar has exhibited substantial strength in the past few months, both against the euro, and against a basket of currencies, as noted in the press (e.g., [1] [2]) While this assessment is correct, it's useful to keep the dollar's movement in perspective.

Figure 1: Log value of US dollar on trade weighted basis against other major currencies, 1973M01=0 (blue), and log EUR/USD exchange rate (red). Up denotes a strengthening of the dollar. Changes are interpretable as percentage change, i.e., a change from -0.04 to -0.00 represents a 4% appreciation. Source: Federal Reserve Board via FRED, Pacific Exchange Services, and author's calculations.

The appreciation since July looks substantial on a broad basis — 7.8% in log terms, bringing the value back to where it was in the wake of the Lehman collapse. Figure 2 provides a longer view.

Figure 2: Log nominal value of US dollar on trade weighted basis against broad basket of currencies, 2005M01=0 (blue), and real (CPI deflated) value (red). Up denotes a strengthening of the dollar. Changes are interpretable as percentage change, i.e., a change from -0.25 to -0.20 represents a 5% appreciation. Vertical dashed line at Lehman. NBER defined recession dates shaded gray. Source: Federal Reserve Board via FRED, NBER, and author's calculations.

In real (CPI deflated) terms, the appreciation is less pronounced; as of November, it's some 8.4% lower than it was in March 2009. If nominal matches real in December, then it'll be about 6% lower.

Furthermore, as discussed in previous posts, it's not clear that CPI deflated measures of the real exchange rate are the most useful for measuring international competitiveness. A more useful concept would be the labor productivity adjusted measure, namely the unit labor cost (ULC) deflated real rate. I plot both series in Figure 3, over a long time span.