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Dollar Depreciation and Inflation

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Since its most recent peak on February 27, 2002, the dollar has depreciated more than 12% on a trade-weighted average basis against the currencies of our major trading partners. Surprisingly, this hefty depreciation has had relatively little impact on the prices of most traded goods in the U.S. When the dollar depreciates in foreign exchange markets, the dollar prices of foreign goods will rise, and foreign-currency prices of U.S. goods will fall. As a consequence, worldwide demand will tilt away from foreign-made goods and toward U.S. products. The dollar prices of traded goods in the U.S.—imports and exports— should rise.

Suggested citation: "Dollar Depreciation and Inflation," Federal Reserve Bank of Cleveland, Economic Trends, no. 04-04, pp. 08, 04.01.2004.

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