What is a 'Currency Basket'

A currency basket is a selected group of currencies in which the weighted average is used as a measure of the value or the amount of an obligation. A currency basket functions as a benchmark for regional currency movements - its composition and weighting depend on its purpose.

Colloquially, a currency basket is often referred to as a currency cocktail. 

BREAKING DOWN 'Currency Basket'

A currency basket is commonly used in contracts as a way of avoiding (or minimizing) the risk of currency fluctuations. The European currency unit (which was replaced by the euro) and the Asian currency unit are examples of currency baskets. However, the most well-known currency basket is the U.S. dollar index (USDX).

The U.S. dollar index started in 1973, and today is a basket of six currencies; the euro, Japanese yen, Canadian dollar, British pound, Swedish krona and Swiss franc. The euro is by far the biggest weighting making up 58 percent of the basket. During the 21st century the index has reached a high of 121 during the tech boom and a low of 71 just prior to the Great Recession. 

Usage of Currency Baskets

Equity investors who have exposure to different countries will use a currency basket to smooth risk. Because their core investment strategies are in the equity markets, they do not want to report any substantial losses in a market they are not experts in. The same can be said for bondholders. 

On the other hand, currency traders who have a broad-based view of a single currency will choose to own that currency against a variety of different currencies. For example, traders that are bullish the U.S. dollar could use the USDX to express this trade. Traders and investors can build their own currency baskets with different weightings depending on their strategy. 

 

RELATED TERMS
  1. U.S. Dollar Index - USDX

    The U.S. dollar index is a measure of the U.S. dollar's value ...
  2. Currency ETF

    Currency ETFs (exchange-traded funds) aim to replicate movements ...
  3. Key Currency

    A key currency used is money issued by stable, developed country ...
  4. Accounting Currency

    Accounting currency is the monetary unit used when recording ...
  5. Asian Currency Unit - ACU

    A proposed basket of Asian currencies, similar to the European ...
  6. Funding Currency

    A funding currency is exchanged in a currency carry trade. Typically ...
Related Articles
  1. Trading

    Top 5 Hardest-Hit Currencies

    The value of a country's currency is dependent on many factors that will cause it to fluctuate, relative to other world currencies.
  2. Investing

    Currency Positions You Can Take Now

    The foreign currency market is the largest financial market in the world, and investors in this market have many options.
  3. Investing

    Protect your foreign investments from currency risk

    Hedging against currency risk can add a level of safety to your offshore investments.
  4. Insights

    A Primer On Reserve Currencies

    For nearly a century, the U.S. dollar has served as the world's premier reserve currency, but the future is uncertain.
  5. Investing

    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 ...
  6. Trading

    Understanding the spread in retail currency exchange rates

    Understanding how exchange rates are calculated and shopping around for the best rates may mitigate the effect of wide spreads in the retail forex market.
  7. Investing

    Looking to Hedge on Currency Volatility? Consider...

    In an attempt to dampen down the impact of the stronger dollar, investors have been turning to currency hedged exchange traded funds (ETFs) in a big way.
  8. Tech

    The Basics Of Currency Trading

    Trading in the currency market isn't easy. We tell you what you need to know before starting.
RELATED FAQS
  1. What is foreign exchange?

    Foreign exchange is the conversion of a country's currency into another. In a free economy, a country's currency is valued ... Read Answer >>
  2. How are international exchange rates set?

    Knowing the value of your home currency in relation to different foreign currencies helps investors to analyze investments ... Read Answer >>
  3. How is spread calculated when trading in the forex market?

    First, remember that in the forex markets investors trade one currency for another. Therefore, currencies are quoted in terms ... Read Answer >>
Hot Definitions
  1. Futures Contract

    An agreement to buy or sell the underlying commodity or asset at a specific price at a future date.
  2. Yield Curve

    A yield curve is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but ...
  3. Portfolio

    A portfolio is a grouping of financial assets such as stocks, bonds and cash equivalents, also their mutual, exchange-traded ...
  4. Gross Profit

    Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
  5. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
  6. Intrinsic Value

    Intrinsic value is the perceived or calculated value of a company, including tangible and intangible factors, and may differ ...
Trading Center