Over the last 3 decades, the U.S. exchange rate has periodically been a significant concern to exporters and to economic policy-makers. More than once, the real U.S. exchange rate has changed by 40 percent or more in the space of a few years.

Exchange rate changes can be a signal of larger issues that, in turn, have a much larger impact on cotton than the exchange rates themselves—the former Soviet Union in 1992 is an example. Exchange rates also can be a channel for macro-economic factors driving the economy, indirectly affecting cotton—the euro is a case in point here. The depreciation of the euro is one way the marketplace is expressing concern about the transition from German monetary control to broader control. European Union (EU) currencies have been effectively tied to the mark for a number of years, but in a sense the union of these currencies adds uncertainty to the reputation developed by Germany’s central bank and has the potential of greater instability. As the euro has depreciated partly in response to this concern, the new European Central Bank has felt obliged to demonstrate its resolve to prevent inflation by cutting interest rates slowly, and with hindsight seems to have erred on the side of slower economic growth in the EU. This in turn has contributed to the global slowdown in 2001, reducing demand for cotton.

Finally, as anyone involved in internationally trade goods, like cotton and textiles, is well aware, exchange rates can directly influence international trade in goods. Exchange rates are notoriously difficult to predict, are highly volatile, and exhibit persistent trends. Since 1995, the U.S. dollar has been on a strengthening trend, affecting the competitiveness of the U.S. textile industry, and depressing commodity prices in dollar terms. This paper will start from this perspective—the most simple direct effects. It will then discuss some of the factors causing exchange rates to shift (which are not perfectly understood), look at how some of these factors have influenced exchange rates in major cotton producing and consuming countries, and conclude by trying to bring this discussion together with respect to future prospects for the U.S. exchange rate in general.