Along with the Anti-Euro Index and Bloomberg Dollar spot index, we have the trade-weighted dollar index. If we look at the geometric weight average, we will see that the Euro makes up a significant portion of the US Dollar index. The Euro is the currency of at least 19 European Union member states out of 27. This gave birth to the Anti-Euro index. Hence, traders looked for other more balanced indexes. We have the Bloomberg Dollar index and our main topic for today is the Trade Weighted Dollar index.
The trade-weighted Dollar index
The Federal Reserve is the creator of this US Dollar index. Various economists and currency analysts widely use it. If you want to know more about it, the Federal Reserve has a website, and you can look up “Federal Reserve Economic Data.”
People sometimes refer to the trade-weighted Dollar index as a “broad index.” It tells us how valuable the US Dollar is compared to other countries’ currencies. As its name suggests, this index is trade-weighted. Its main goal is improving the ICE’s US Dollar Index by doing two things: annual weight update and using more currencies. ICE is short for Intercontinental Exchange, and it is a privately-owned company.
Why did the Federal Reserve create this index?
Back in 1998, the Federal Reserve thought they needed a more accurate index that could reflect the USD’s value versus other countries’ currencies depending on how competitive the US goods are versus other countries’ goods. They want the US trade to be more updated.
Tell me more about the trade-weighted US Dollar index.
The trade-weighted index tells us a lot about the weighted average of the US Dollar’s foreign exchange value against other currencies. The ‘other currencies’ that we are talking about here are the major US trading partners board group.
Let us take a glimpse of the index’s current weighting in terms of percentage:
- Eurozone – 18.947
- China – 15.835
- Canada – 13.384
- Mexico – 13.524
- Japan – 6.272
- United Kingdom – 5.306
- Korea – 3.322
- Taiwan – 1.95
- Singapore – 1.848
- Brazil – 1.979
- Malaysia – 1.246
- Hong Kong – 1.41
- India – 2.874
- Switzerland – 2.554
- Thailand – 1.096
- Australia – 1.395
- Russia – 0.526
- Israel – 1.053
- Sweden – 0.52
- Indonesia – 0.675
- Saudi Arabia – 0.499
- Chile – 0.625
- Philippines – 0.687
- Colombia – 0.604
- Argentina – 0.507
This is an enumeration from the strongest to weakest in percentage form. The total would is, of course, 100.
US Dollar index versus the trade-weighted US Dollar index
These two differ in terms of their basket of currencies and weights involved. Regarding basket currencies, we can say that the trade-weighted index is more inclusive of other countries. So, it might make sense to say that it has a better reflection of USD’s value in the world. In terms of weights, they depend on the trade data per year.
Now, what else?
We mentioned a while ago that there are two more US Dollar indexes. One is the Anti-Euro index that we already mentioned, and the other is the Bloomberg Dollar spot index. It will massively help you as a trader if you know them all.