💱 NordFX Education: Nominal vs Real Exchange Rates – Why a Cheaper Currency Is Not Always More Competitive
Your screen shows one price. Your competitiveness depends on another. 🎯
🛒 The basket test (illustrative numbers)
Take a basket of goods that costs $100 in the US and 10,000 XYZ at home. At 100 XYZ per USD, the two baskets are equal. ⚖️
Then XYZ weakens 5% to 105 per USD. Exporters celebrate. 🎉 But home prices rose 8% while US prices rose 2%:
🏠 Home basket: 10,800 XYZ ÷ 105 = $102.86
🇺🇸 US basket: $102.00
The nominal rate fell 5%, yet the home basket is now slightly pricier than the US one. The cheaper currency bought no real advantage. That gap is the real exchange rate. Inflation ate the discount. 🔥
📌 Nominal: the quoted price, such as USD/JPY 157.88.
📌 Real: the nominal rate adjusted for relative prices. A real effective rate (REER) weights a whole basket of trading partners.
🇯🇵 The yen is the live case
USD/JPY sits near 158, but the yen's REER was 65.93 in May (2020 = 100). In December 1986 it was 141.77, so the yen has lost more than half its inflation-adjusted value. Tokyo is uneasy. Finance Minister Katayama said an undervalued yen "generally poses problems". And the BoJ's rate is only 1.25%, against elevated US yields. 🏦
🌍 Why this matters right now
🛢️ Brent is above $100. A weaker currency makes imported energy more expensive.
📈 The US 10-year yield is around 5.2%, and the dollar index is near its 17-month high of about 102.
💶 EUR/USD is near 1.125, close to this year's low.
⚔️ Iran and Hormuz tensions and tariff headlines keep inflation differentials in play.
💡 Takeaways
Compare inflation, not only the chart.
Imported costs can cancel a weak-currency gain.
Policy warnings can reverse a trend fast.
Watch today's US jobs data for dollar volatility. ⚡
Cheap is a quote. Competitive is a calculation. 🧠
NORDFX Global
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