Effective exchange rate index

The Trade Weighted Effective Exchange Rate Index, a common form of the effective exchange rate index, is a multilateral exchange rate. It is compiled as a weighted average of exchange rates of home and foreign currencies, with the weight for each foreign country equal to its share in trade. Depending on the purpose for which it is used, it can be export-weighted, import-weighted, or total-external trade weighted.

The trade weighted effective exchange rate index is an economic indicator for comparing the exchange rate of a country against those of their major trading partners. By design, movements in the currencies of those trading partners with a greater share in an economy's exports and imports will will a greater effect on the effective exchange rate. In a multilateral, highly globalized, world, the effective exchange rate index is much more useful than a bilateral exchange rate, such as that between the Australian dollar and the United States dollar, for assessing changes in the competitiveness due to exchange rate movements.

The interpretation of the effective exchange rate is that if the index rises, the purchasing power of that currency also rises (the currency strengthened against those of the country's or area's trading partners). This will reduce the cost of imports but will undermine the competitiveness of exports.

External links

• Data from Bank for International Settlements: effective exchange rate indices
• Monthly data from U.S. Federal Reserve: Monthly Rates
• Effective exchange rates of the euro from the European Central Bank: data, methodology