Trade-Weighted Dollar

AAA

DEFINITION of 'Trade-Weighted Dollar'

A measurement of the foreign exchange value of the U.S. dollar compared against certain foreign currencies. Trade-weighted dollars give importance - or weight - to currencies most widely used in international trade, over comparing the value of the U.S. dollar to all foreign currencies. Since the currencies are weighted differently, changes in each currency will have a unique effect on the trade-weighted dollar and corresponding indexes.

INVESTOPEDIA EXPLAINS 'Trade-Weighted Dollar'

The trade-weighted dollar is used to determine the U.S. dollar purchasing value, and to summarize the effects of dollar appreciation and depreciation against foreign currencies. When the value of the dollar increases, imports to the U.S. become less expensive while exports to other countries become more expensive.

Two primary measures of the trade-weighted dollar are used. The first is the U.S. Dollar Index, created in 1973. It is calculated using six major world currencies: the euro, Japanese yen, Canadian dollar, British pound, Swedish krona and Swiss franc. The second is the Trade Weighted U.S. Dollar Index, sometimes called the Broad Index. This index was introduced by the U.S. Federal Reserve Board in 1998 in response to the implementation of the euro (which replaced many of the foreign currencies that were previously used in the earlier index) and to more accurately reflect current U.S. trade patterns. The Federal Reserve selected 26 currencies to use in the broad index, anticipating the adoption of the euro by eleven countries of the European Union (EU). When the broad index was introduced, U.S. trade with the 26 represented economies accounted for over 90% of the total U.S. imports and exports.

RELATED TERMS
  1. Exchange Rate

    The price of a nation’s currency in terms of another currency. ...
  2. Foreign Currency Effects

    The gain or loss on foreign investments due to changes in the ...
  3. Currency

    A generally accepted form of money, including coins and paper ...
  4. U.S. Dollar Index - USDX

    A measure of the value of the U.S. dollar relative to majority ...
  5. Forex - FX

    The market in which currencies are traded. The forex market is ...
  6. Brexit

    The Brexit, an abbreviation of "British exit" that mirrors the ...
RELATED FAQS
  1. What is the correlation between American stock prices and the value of the U.S. dollar?

    The correlation between any two variables (or sets of variables) summarizes a relationship, whether or not there is any real-world ... Read Full Answer >>
  2. What am I buying and selling in the forex market?

    The forex market is the largest market in the world. According to the Triennial Central Bank Survey conducted by the Bank ... Read Full Answer >>
  3. Does raising the minimum wage increase inflation?

    There are conflicting views on whether raising the minimum wage increases inflation. Tied to this is the question of what ... Read Full Answer >>
  4. How do open market operations affect the money supply of an economy?

    The open market operations conducted by the Federal Reserve affect the money supply of an economy through the buying and ... Read Full Answer >>
  5. What risks does a business owner face under a business structure with unlimited liability?

    The risks that a business owner faces under a business structure with unlimited liability are literally unlimited, but they ... Read Full Answer >>
  6. What is affected by the interest rate risk?

    Interest rate risk is the risk that arises when the absolute level of interest rates fluctuate. Interest rate risk directly ... Read Full Answer >>
Related Articles
  1. Forex Education

    Currency Exchange: Floating Rate Vs. Fixed Rate

    Baffled by exchange rates? Wonder why some currencies fluctuate while others are pegged? This article has the answers.
  2. Options & Futures

    Traders: Which Markets Should You Trade?

    Being aware of other markets and other trading methods can help traders fine tune methods, save costs and add profits.
  3. Economics

    West Coast Vs. East Coast Economy

    The East’s focus on finance and banking contrasts the West’s drive toward technological innovation. But one thing is clear--each knows it needs the other.
  4. Investing Basics

    What is a Nominal Value?

    The nominal value of a security, such as a stock or bond, remains fixed for the duration of its life.
  5. Economics

    Explaining the Human Development Index

    The Human Development Index (HDI) is a metric developed by the United Nations to take the emphasis off economic growth and focus on human wellbeing.
  6. Economics

    Healthiest And Safest European Economies

    Economic indicators are to economists what symptoms are to doctors: signs of the relative well-being of the patient.
  7. Economics

    Gaining Market Influence-- The Case of US Shale

    A convergence of sustained bank financing, falling production costs and rising oil prices might position the US shale industry for a greater market role.
  8. Investing

    Why Some Investors Are Tilting Toward TIPS

    Last month’s five-year TIPS auction drew nearly $48 billion in interest, a sign of recent renewed demand for this inflation indexed asset among investors.
  9. Economics

    What is the International Monetary Fund?

    The International Monetary Fund fosters global monetary cooperation and sustainable economic growth.
  10. Economics

    Volatility In The Yen Has Brought On Big Changes

    There's a difference between translation effects and the real effects that FX swings bring. We look at the difference, and how it's changing Japan.

You May Also Like

Hot Definitions
  1. Mixed Economic System

    An economic system that features characteristics of both capitalism and socialism.
  2. Net Worth

    The amount by which assets exceed liabilities. Net worth is a concept applicable to individuals and businesses as a key measure ...
  3. Stop-Loss Order

    An order placed with a broker to sell a security when it reaches a certain price. A stop-loss order is designed to limit ...
  4. Covered Call

    An options strategy whereby an investor holds a long position in an asset and writes (sells) call options on that same asset ...
  5. Butterfly Spread

    A neutral option strategy combining bull and bear spreads. Butterfly spreads use four option contracts with the same expiration ...
  6. Unlevered Beta

    A type of metric that compares the risk of an unlevered company to the risk of the market. The unlevered beta is the beta ...
Trading Center