The Dollar's Depreciation and Inflation

Factors underlying the dollar’s depreciation may be changing in a manner that could put upward pressure on U.S. prices, should they continue. Nevertheless, dollar depreciations do not cause inflation. Inflation is a purely home-grown, monetary phenomenon. Since early February 2002, the U.S. dollar has depreciated nearly 31 percent on a trade-weighted basis against the currencies of the major industrialized countries and has also depreciated more than 6 percent on a similar basis against the currencies of key developing countries. On a real basis—that is, after controlling for the effects of domestic and foreign inflation—the dollar has depreciated nearly 26 percent against the major industrialized countries’ currencies and almost 7 percent against the key developing countries’ currencies.