What is a 'Nominal Effective Exchange Rate - NEER'

The nominal effective exchange rate (NEER) is an unadjusted weighted average rate at which one country's currency exchanges for a basket of multiple foreign currencies. In economics, the NEER is an indicator of a country's international competitiveness in terms of the foreign exchange (forex) market. Forex traders sometimes refer to the NEER as the trade-weighted currency index.

BREAKING DOWN 'Nominal Effective Exchange Rate - NEER'

The NEER may be adjusted to compensate for the inflation rate of the home country relative to the inflation rate of its trading partners. The resulting figure is the real effective exchange rate (REER).

Unlike the relationships in a nominal exchange rate, NEER is not determined for each currency separately. Instead, one individual number, typically an index, expresses how a domestic currency’s value compares against multiple foreign currencies at once.

If a domestic currency increases against a basket of other currencies inside a floating exchange rate regime, NEER is said to appreciate. If the domestic currency falls against the basket, the NEER depreciates.

Uses of NEER

The NEER only describes relative value; it cannot definitively show whether a currency is strong or gaining strength in real terms. It only describes whether a currency is weak or strong, or weakening or strengthening, compared to foreign currencies. As with all exchange rates, the NEER can help identify which currencies store value more or less effectively. Exchange rates influence where international actors buy or sell goods.

NEER is used in economic studies and for policy analysis about international trade. It is also used by forex traders who engage in currency arbitrage. The Federal Reserve calculates three different NEER indices for the United States: the broad index, the major currencies index and the other important trading partners (OITP) index.

The Basket of Foreign Currencies

Every NEER compares one individual currency against a basket of foreign currencies. This basket is chosen on the basis of the domestic country's most important trading partners, as well other major currencies.

The world's major currencies are the U.S. dollar, the euro, the British pound sterling, the Japanese yen, the Australian dollar, the Swiss franc, the South African rand and the Canadian dollar.

The value of foreign currencies in a basket are weighted according to the value of trade with the domestic country. This could be export or import value, the total value of exports and imports combined, or some other measure. The weights often relate to the assets and liabilities between different countries.

A higher NEER coefficient (above 1) means that the home country's currency is usually worth more than an imported currency, and a lower coefficient (below 1) means that the home currency is usually worth less than the imported currency.

There is no international standard for selecting a basket of currencies. The Organization for Economic Co-operation and Development (OECD) basket is different than the one for the International Monetary Fund (IMF), the Federal Reserve or Bank of Japan. However, many different institutions rely on the International Financial Statistics (IFS) published by the IMF.

RELATED TERMS
  1. Currency Basket

    A selected group of currencies in which the weighted average ...
  2. International Currency Exchange ...

    The rate at which two currencies in the market can be exchanged. ...
  3. Currency Pairs

    Two currencies with exchange rates that are traded in the retail ...
  4. Currency

    Currency is a generally accepted form of money, including coins ...
  5. Currency Substitution

    The use of a foreign currency in transactions in place of the ...
  6. Currency Appreciation

    An increase in the value of one currency in terms of another. ...
Related Articles
  1. Trading

    Drastic Currency Changes: What's The Cause?

    Currency fluctuations often defy logic. Learn the trends and factors that result in these movements.
  2. Trading

    6 Factors That Influence Exchange Rates

    An in depth look at out how a currency's relative value reflects a country's economic health and impacts your investment returns.
  3. Investing

    Why Countries Keep Reserve Currency

    Central banks and financial institutions hold large amounts of foreign money as their reserve currency.
  4. Trading

    What Happens in a Currency Crisis?

    A currency crisis comes from a decline in the value of a country’s currency.
  5. Trading

    The Effects Of Currency Fluctuations On The Economy

    Currency fluctuations are a natural outcome of the floating exchange rate system that is the norm for most major economies. The exchange rate of one currency versus the other is influenced by ...
  6. Investing

    Protect Your Foreign Investments From Currency Risk

    Hedging against currency risk can add a level of safety to your offshore investments.
  7. Trading

    The Forex Market: Who Trades Currency And Why

    The forex market has a lot of unique attributes that may come as a surprise for new traders.
  8. Trading

    Main Factors that Influence Exchange Rates

    The exchange rate is one of the most important determinants of a country's relative level of economic health and can impact your returns.
  9. Trading

    Interest Rate and Currency Value And Exchange Rate

    In general, higher interest rates in one country tend to increase the value of its currency.
RELATED FAQS
  1. What is foreign exchange?

    Foreign exchange, or Forex, is the conversion of one country's currency into that of another. In a free economy, a country's ... Read Answer >>
  2. How can I invest in a foreign exchange market?

    The foreign exchange market, also called the currency market or forex (FX), is the world's largest financial market, accounting ... Read Answer >>
  3. How are international exchange rates set?

    International currency exchange rates display how much one unit of a currency can be exchanged for another currency. Currency ... Read Answer >>
  4. How does inflation affect the exchange rate between two nations?

    Understand how inflation can affect foreign exchange rates of a currency and how it is just one of many economic factors ... Read Answer >>
  5. How do changes in national interest rates affect a currency's value and exchange ...

    Understand the role that changes in interest rates can play in determining the value and foreign exchange rate of a country's ... Read Answer >>
  6. What are key economic factors that can cause currency depreciation in a country?

    Read about the causes of currency devaluation, and find out how to differentiate between relative and absolute currency devaluation. Read Answer >>
Hot Definitions
  1. Federal Direct Loan Program

    A program that provides low-interest loans to postsecondary students and their parents. The William D. Ford Federal Direct ...
  2. Cash Flow

    The net amount of cash and cash-equivalents moving into and out of a business. Positive cash flow indicates that a company's ...
  3. PLUS Loan

    A low-cost student loan offered to parents of students currently enrolled in post-secondary education. With a PLUS Loan, ...
  4. Graduate Record Examination - GRE

    A standardized exam used to measure one's aptitude for abstract thinking in the areas of analytical writing, mathematics ...
  5. Graduate Management Admission Test - GMAT

    A standardized test intended to measure a test taker's aptitude in mathematics and the English language. The GMAT is most ...
  6. Magna Cum Laude

    An academic level of distinction used by educational institutions to signify an academic degree which was received "with ...
Trading Center