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 euro makes up more than 57 percent of the index weighting. 

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.

During the financial crisis, both measures of the trade-weighted dollar rose sharply during the Great Recession as investors flocked to the U.S. dollar, which is considered a safe haven currency. 

  1. Reserve Currency

    A reserve currency is held by central banks and other major financial ...
  2. Funding Currency

    A funding currency is exchanged in a currency carry trade. Typically ...
  3. Exchange Rate

    An exchange rate is the price of a nation’s currency in terms ...
  4. Direct Quote

    A direct quote is a foreign exchange rate quoted as the domestic ...
  5. International Currency Exchange ...

    An international currency exchange rate is the rate at which ...
  6. Currency ETF

    Currency ETFs aim to replicate movements of a single currency ...
Related Articles
  1. 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 ...
  2. 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.
  3. 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.
  4. Trading

    The U.S. Dollar: What Every Forex Trader Needs To Know

    The U.S. dollar is by far the most significant currency in the global market. Find out what you need to know if you want to trade it.
  5. Investing

    Hedge Against Exchange Rate Risk With Currency ETFs

    Currency moves are unpredictable and can have an adverse effect on portfolio returns. Find out how to protect yourself.
  6. Trading

    Countries Most Affected By A Strong U.S. Dollar

    The U.S. dollar is still the most important currency in the world. It's used for trade, foreign reserves, and as a substitute for the gold standard. As the U.S. dollar continues to grow stronger, ...
  7. Trading

    The U.S. Dollar's Unofficial Status as World Currency

    Discover how and why the U.S. dollar emerged as official currency in many foreign countries.
  8. Investing

    4 U.S. Companies With High Currency Exposure

    The U.S. dollar has been strengthening against the euro which is a bad sign for the U.S. exporters as the goods become more expensive.
  1. 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 >>
  2. 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 >>
  3. How do changes in national interest rates affect a currency's value and exchange ...

    Generally, higher interest rates increase the value of a given country's currency, but Interest rates alone do not determine ... Read Answer >>
  4. How is the forex spot rate calculated?

    The forex spot rate is determined by supply and demand. Banks all over the world are buying and selling different currencies ... Read Answer >>
Hot Definitions
  1. Perfect Competition

    Pure or perfect competition is a theoretical market structure in which a number of criteria such as perfect information and ...
  2. Compound Interest

    Compound Interest is interest calculated on the initial principal and also on the accumulated interest of previous periods ...
  3. Income Statement

    A financial statement that measures a company's financial performance over a specific accounting period. Financial performance ...
  4. Leverage Ratio

    A leverage ratio is any one of several financial measurements that look at how much capital comes in the form of debt, or ...
  5. Annuity

    An annuity is a financial product that pays out a fixed stream of payments to an individual, primarily used as an income ...
  6. Restricted Stock Unit - RSU

    A restricted stock unit is a compensation issued by an employer to an employee in the form of company stock.
Trading Center