Trade-Weighted Dollar

What is a 'Trade-Weighted Dollar'

A trade-weighted dollar is 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.

BREAKING DOWN '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. U.S. Dollar Index - USDX

    A measure of the value of the U.S. dollar relative to majority ...
  2. Dollar Rate

    The exchange rate of a currency against the U.S. dollar (USD). ...
  3. Reciprocal Currency

    In the foreign exchange market, a currency pair that involves ...
  4. Currency Pairs

    Two currencies with exchange rates that are traded in the retail ...
  5. Weak Dollar

    A situation where the U.S. dollar's value is decreasing relative ...
  6. International Currency Exchange ...

    The rate at which two currencies in the market can be exchanged. ...
Related Articles
  1. Trading

    The Pros & Cons Of A Strong Dollar

    As the U.S. economy has emerged from the Great Recession, the strength of the U.S. dollar has also improved.
  2. Markets

    Will the Yuan Become an International Reserve Currency?

    Although still a matter of when, China is likely to reach a significant milestone when the International Monetary Fund decides to include the Chinese yuan in its special drawing rights basket ...
  3. Trading

    What is an Indirect Quote?

    An indirect quote expresses the amount of foreign currency required to buy or sell one unit of the domestic currency in the foreign exchange markets.
  4. Trading

    How Do You Make Money Trading Money?

    Making money in the foreign exchange market is a speculative process. You are betting that the value of one currency will increase relative to another.
  5. Trading

    What is a Direct Quote?

    A direct quote uses variable amounts of the home country’s currency to compare to a fixed amount of a foreign currency.
  6. Markets

    Why Countries Keep Reserve Currency

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

    Top Economic Factors That Depreciate The $US

    A variety of factors contribute to currency depreciation, including monetary policy, inflation, demand for currency, economic growth and export prices.
  8. Investing

    Explaining Foreign Exchange Risk

    Foreign exchange risk is the chance that an investment’s value will decrease due to changes in currency exchange rates.
  9. ETFs & Mutual Funds

    The 3 Largest Currency ETFs (UUP, EUO)

    Learn about the world's foreign exchange markets, and read about the three largest currency-focused exchanged-traded funds available as of March 2016.
  10. Trading

    What Do Weak Dollar And Strong Dollar Mean?

    A weak dollar and a strong dollar describe the strength of the U.S. dollar in comparison to other currencies in the foreign exchange market.
RELATED FAQS
  1. 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 >>
  2. What do the terms weak dollar and strong dollar mean?

    The two terms, weak dollar and strong dollar, are generalizations used in the foreign exchange market to describe the relative ... 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. 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 >>
  5. How can I trade in cross currency pairs if my forex account is denominated in U.S. ...

    The forex market allows individuals to trade on nearly all of the currencies in the world. However, most of the trading is ... Read Answer >>
  6. Is there a world currency? If so, what is it?

    There is no such thing as a world currency. However, since World War II, the dominant or reserve currency of the world has ... Read Answer >>
Hot Definitions
  1. European Union - EU

    A group of European countries that participates in the world economy as one economic unit and operates under one official ...
  2. Sell-Off

    The rapid selling of securities, such as stocks, bonds and commodities. The increase in supply leads to a decline in the ...
  3. Brazil, Russia, India And China - BRIC

    An acronym for the economies of Brazil, Russia, India and China combined. It has been speculated that by 2050 these four ...
  4. Brexit

    The Brexit, an abbreviation of "British exit" that mirrors the term Grexit, refers to the possibility of Britain's withdrawal ...
  5. Underweight

    1. A situation where a portfolio does not hold a sufficient amount of a particular security when compared to the security's ...
  6. Russell 3000 Index

    A market capitalization weighted equity index maintained by the Russell Investment Group that seeks to be a benchmark of ...
Trading Center