trade_weighted_dollar_index
Monthly Real Trade Weighted Dollar Index Data

What Is the Trade Weighted US Dollar Index?

The Trade Weighted US Dollar Index, like the standard US Dollar Index measures the value of the US Dollar relative to a basket of world currencies. The Trade Weighted Index was introduced by the Federal Reserve back in 1998 for two main reasons. Firstly in anticipation of the Euro, which lead to the elimination of several currencies used in calculating the standard US Dollar Index. Secondly, it was felt that the standard US Dollar Index wasn’t keeping up with the changes in US Trade. While the standard US Dollar Index is still widely used, many traders have switched over to the Trade Weighted US Dollar Index which they feel gives a better measure of the relative strength of the US Dollar.

The Basket

The basket used in calculating the Trade Weighted US Dollar Index, is more comprehensive. The Federal Reserve chose a selection of 26 currencies which combined account for over 90% of US imports and exports. This broad selection of currencies is why the Trade Weighted Index is often referred to as the broad index. The 26 currencies included are listed below:

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Euro (EUR)

Canadian Dollar (CAD)

Japanese Yen (JPY)

Mexican Peso (MXN)

Chinese Renminbi (RMB)

Great British Pound (GBP)

New Taiwan Dollar (TWD)

South Korean Won (KRW)

Singapore Dollar (SGD)

Hong Kong Dollar (HKD)

Malaysian Ringgit (MYR)

Brazilian Real (BRL)

Swiss Franc (CHF)

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Thai Baht (THB)

Philippine Peso (PHP)

Australian Dollar (AUD)

Indonesian Rupiah (IDR)

Indian Rupee (INR)

Israeli New Shekel (ILS)

Saudi Riyal (SAR)

Russian Ruble  (RUB)

Swedish Krona (SEK)

Argentine Peso (ARS)

Venezuelan bolívar (VEF)

Chilean Peso (CLP)

Colombian Peso (COP)

[/one_half_last]The Weighting of the Index

The Trade Weighted Index is the geometric mean of the bilateral exchange rates included in the basket. The weight assigned to each currency in the Index is based on trade data, with the US’s bigger trade partners being given a greater weighting.  The weightings of the various currencies included in the basket are only updated once a year, though the index is updated on a daily basis. It is possible to find the most up to date weightings, on the Federal Reserve’s website.

Reading the Index

The Index is published in both real and nominal terms, which makes interpreting the Index more complicated. The fact that real data is only published monthly makes the data significantly less useful. Unlike the standard US Dollar Index, the Trade Weighted Dollar Index lacks a baseline, rather the Index is quoted in terms currency units per US dollar. A decrease in the value of the Trade Weighted Dollar Index, shows that the US Dollar has decreased in value compared with the broad basket of currencies used to calculate the Index. While an increase in the value of the Index, shows that US Dollar has increased in value compared with the basket of currencies. The Trade Weighted Dollar Index can help traders indentify long term trends and get a quick snapshot of how the US Dollar is performing against a broad range of currencies.

Calculating the Index

There are two separate equations for calculating the Trade Weighted US Dollar Index. One equation is needed to calculate the nominal Index and another to calculate the real Index. The calculation required to work out the Trade Weighted US Dollar Index is particularly challenging and is something that only those with a real passion for maths will be interested in. Those looking to learn how to calculate the Index should check out Wikipedia.

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