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The Trade Weighted Index
, also known as the effective exchange rate
, is a multilateral exchange rate which is a weighted average of exchange rates of home
currencies, with the weight for each foreign
country equal to its share in trade. It measures the average price of a home
good relative to the average price of goods of trading partners, using the share of trade with each country as the weight for that country.
The trade weighted index is an economic instrument used by economies to compare their exchange rate
In finance, an exchange rate between two currencies is the rate at which one currency will be exchanged for another. It is also regarded as the value of one country’s currency in terms of another currency...
against those of their major trading partners. Those trading partners that constitute a larger portion of an economy's exports and imports receives a higher index. The trade weighted index is used to make a complete comparison between one economy's currency
In economics, currency refers to a generally accepted medium of exchange. These are usually the coins and banknotes of a particular government, which comprise the physical aspects of a nation's money supply...
and other currencies it interacts with. It is a much more comprehensive analysis than comparing two currencies, for example, the Australian dollar
The Australian dollar is the currency of the Commonwealth of Australia, including Christmas Island, Cocos Islands, and Norfolk Island, as well as the independent Pacific Island states of Kiribati, Nauru and Tuvalu...
and the United States dollar
The United States dollar , also referred to as the American dollar, is the official currency of the United States of America. It is divided into 100 smaller units called cents or pennies....
The interpretation of the effective exchange rate is that if the index increases, the purchasing power of that currency is higher (the currency strengthened against those of the country's or area's trading partners). A lower index means that the currency depreciated (devaluation) so that you need more of that currency to pay for imports.
- Data from Bank for International Settlements
The Bank for International Settlements is an intergovernmental organization of central banks which "fosters international monetary and financial cooperation and serves as a bank for central banks." It is not accountable to any national government...
: effective exchange rate indices
- Monthly data from U.S. Federal Reserve: Monthly Rates
- Effective exchange rates of the euro from the European Central Bank
The European Central Bank is the institution of the European Union that administers the monetary policy of the 17 EU Eurozone member states. It is thus one of the world's most important central banks. The bank was established by the Treaty of Amsterdam in 1998, and is headquartered in Frankfurt,...
: data, methodology