What is the '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 on 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 based on the domestic country's most important trading partners as well as 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 of 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 basket for the International Monetary Fund (IMF) or 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 currency basket is a group of currencies used to measure the ...
  2. Key Currency

    A key currency used is money issued by stable, developed country ...
  3. Currency ETF

    Currency ETFs (exchange-traded funds) aim to replicate movements ...
  4. Foreign Currency Effects

    Foreign currency effects are gains of losses on foreign investments ...
  5. Currency Board

    A currency board is a monetary authority that makes decisions ...
  6. Exchange Rate

    An exchange rate is the price of a nation’s currency in terms ...
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. Investing

    Protect your foreign investments from currency risk

    Hedging against currency risk can add a level of safety to your offshore investments.
  3. 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.
  4. Trading

    Understand the Indirect Effects of Exchange Rates

    Exchange rates have a tremendous influence on the economy. Exchange rates can indirectly affect many of the most important aspects of our lives.
  5. Trading

    Currency exchange: Floating rate versus fixed rate

    Baffled by exchange rates? Wonder why some currencies fluctuate while others are pegged? This article has the answers.
  6. Trading

    Forex trading: A beginner's guide

    Foreign exchange is the act of changing one country's currency into another country's currency for a variety of reasons, usually for tourism or commerce.
  7. 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 ...
  8. Trading

    Top 5 Forex Risks Traders Should Consider

    With a long list of risks, losses associated with foreign exchange trading may be greater than initially expected. Here are the top 5 forex risks to avoid.
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. 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 >>
  4. How do national interest rates affect a currency's value and exchange rate?

    Generally, higher interest rates increase the value of a country's currency and lower interest rates tend to be unattractive ... Read Answer >>
  5. How does inflation affect the exchange rate between two nations?

    Countries attempt to balance interest rates and inflation, but the interrelationship between the two is complex and can influence ... Read Answer >>
  6. How do you make money trading money?

    Trading money, particularly in the forex market, is a speculative risk, as you are betting that the value of a currency will ... Read Answer >>
Hot Definitions
  1. Portfolio

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

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

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

    Intrinsic value is the perceived or calculated value of a company, including tangible and intangible factors, and may differ ...
  5. Current Assets

    Current assets is a balance sheet item that represents the value of all assets that can reasonably expected to be converted ...
  6. Volatility

    Volatility measures how much the price of a security, derivative, or index fluctuates.
Trading Center