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Effective exchange rate index

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Effective Exchange Rate is an index that describes the relative strength of a currency relative to a basket of other currencies. Although typically that basket is trade-weighted, the trade-weighted effective exchange rate index is not the only way to derive a meaningful effective exchange rate index. Ho(2012)proposed a new approach to compiling effective exchange rate indices. It defines the effective exchange rate as a ratio if the "normalized Exchange Value of Currency i against the US dollar" to the normalized exchange value of the "benchmark currency basket" against the US dollar. The US dollar is here used as numeraire for convenience, and since it cancels out, in principle any other currency can be used instead without affecting the results. The benchmark currency basket is a GDP-weighted basket of the major fully convertible currencies of the world.


  • Lok Sang Ho, "Globalization Exports,and Effective Exchange Rate Indices," Journal of International Money and Finance, Volume 31, Issue 5, September 2012, Pages 996–1007
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