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. Currency

    A generally accepted form of money, including coins and paper ...
  3. Foreign Currency Effects

    The gain or loss on foreign investments due to changes in the ...
  4. Forex - FX

    The market in which currencies are traded. The forex market is ...
  5. U.S. Dollar Index - USDX

    A measure of the value of the U.S. dollar relative to majority ...
  6. Nordic Model

    The social welfare and economic systems adopted by Nordic countries.
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 >>
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

    What is the Income Effect?

    In economics, the income effect is the change in the consumption of goods caused by a change in income, whether income goes up or down.
  4. Economics

    Asian LNG Prices: Not Likely To Rise Anytime Soon

    Asian LNG prices could stay low for an extended period of time, due to low oil prices, less demand and new LNG-producing projects on various continents.
  5. Savings

    Best (And Worst) Ways To Change Money In Europe

    Which are the cheapest– and most costly – ways to exchange money when you're in Europe? See if you made the right choices on your last trip.
  6. Economics

    Bulk Shipping Companies Struggle As Markets Soften

    The "soft" dry bulk shipping market that confronts shipping companies is a result of lower demand from China, and an excessive amount of bulk ships.
  7. Personal Finance

    When Is It Cheaper To Fly To Europe?

    When can you fly to Europe for the lowest fares? Hint: You'll need gloves and a scarf.
  8. Economics

    Could Ukraine's Debt Crisis Destabilize The EU?

    A financial crisis in Ukraine could be a bigger threat to European security than the current financial crisis in Greece.
  9. Economics

    Venezuela Teeters On Edge As Oil Revenues Shrink

    Low oil prices have drastically revised the economic status quo -- dealing a destabilizing blow to oil-exporters like Venezuela due to falling oil revenue.
  10. Economics

    What Must The UK Do To Keep North Sea Oil Afloat?

    The UK government may need to take drastic action to ensure the viability of UK North Sea offshore oil production amid high costs and shrinking margins.

You May Also Like

Hot Definitions
  1. Interest Rate Risk

    The risk that an investment's value will change due to a change in the absolute level of interest rates, in the spread between ...
  2. Income Effect

    In the context of economic theory, the income effect is the change in an individual's or economy's income and how that change ...
  3. Price-To-Sales Ratio - PSR

    A valuation ratio that compares a company’s stock price to its revenues. The price-to-sales ratio is an indicator of the ...
  4. Hurdle Rate

    The minimum rate of return on a project or investment required by a manager or investor. In order to compensate for risk, ...
  5. Market Value

    The price an asset would fetch in the marketplace. Market value is also commonly used to refer to the market capitalization ...
  6. Preference Shares

    Company stock with dividends that are paid to shareholders before common stock dividends are paid out. In the event of a ...
Trading Center