-- The relative price of dollar, as presented by dollar amount per unit other currency exchanged, is determined by its own absolute price, other currencies’ absolute prices, and as well its exchange demand from other currencies
-- The absolute price of dollar, as presented by dollar amount per unit product purchased, is subject to the limitation from its value
-- The exchange demands of currencies are rooted in the cross border movement of goods and services and capital
-- The value of dollar is traceable to the ratio between US money M2 and its total social wealth and gradually changed by disproportional growth between M2 and GDP
The economic rationales, based on which we organize feature construction of our model for US dollar’s valuation, start from the dollar's value.
The fast increased US money M2 compared with slow growth in US national saving has been hurting US dollar’s value given money holders’ growing concerns about the shrinking collaterals - the accumulated wealth per unit dollar.
The damaged value of the US dollar was immediately reflected in its declined absolute price as measured by the soaring price of US dollar priced commodities (after ruling out noises from changes in economic expectation).
Among the features that determine the US dollar's relative price - exchange rate, other currencies’ values play the second important role after US dollar value. This is why we have seen quite consistent monetary policies in all major advanced economy entities facing financial crisis.
The logic is that, while it varies with different economic structures, they can at least control the amount of money printed out by targeting a similar change in ratios of M2 and their corresponding collaterals - total social wealth so that a relative parallel in their currencies’ values and US dollar’s value is maintained.
The part of the US dollar’s value reflected in its domestic products’ prices other than commodities, to some extent, influence its relative prices/exchange rates by what the purchasing power parity implies. However, a convergence in inflations in the US and other countries should be firstly seen followed by changes in exchange rate.
Therefore, it is not that easy to see significant change in US dollar relative price/exchange rate since there is no significant divergence in the value of US dollar and of other major currencies.
In fact, the noticeable changes in US dollar exchange rate come from direct movement in trade and capital. While the balancing or rebalancing between current and capital accounts weighs much less in impacting currency’s price in our model than the currencies’ value does, partially because it reflects only the market demand for US dollars, it actually caused all major changes in US dollar’s exchange rates with other advanced economic entities both because dollar’s relative change in value is rare and because trade flow and capital return are unmanageable.