A trade-weighted index is an objective measure of a currency’s value compared against a basket of other currencies. The importance of each currency in the basket depends on the amount of trade done with the country or economy where that currency is used.
For example, the most important currency in the basket of the trade-weighted index for the Canadian Dollar (CAD) would be the U.S. Dollar (USD), since Canada does over 60% of its trade (imports and exports) with the United States. Therefore, the value of the exchange rate CAD/USD would account for over 60% of the trade-weighted index for the Canadian Dollar.
A trade-weighted index (TWI) can help assess the strength of one a single currency. Compared to regular foreign exchange rates, where one currency’s value is expressed in units of another currency, a trade-weighted index offers a more objective view of a currency’s strength.
For example, if the Euro appreciates against the Dollar, that might be due to the the Euro’s strength or the Dollar’s weakness. One cannot tell which is the case from looking only at the exchange rate EUR/USD. But, if the trade-weighted Euro index increases, this shows that the Euro’s overall performance is getting stronger against its main trading partners, not just the Dollar.
Therefore, a trade-weighted index can be used to obtain an unbiased opinion about a currency’s overall strength. It classifies the “competitiveness” of an economy’s currency versus the currencies of its main trading partners. For Forex traders, it can be a valuable tool to conduct fundamental research and make profitable trading decisions.
Anyone interested or engaged in the exchange of foreign currencies. This site is geared mainly toward Forex traders to whom we offer free real-time TWI charts. But also travelers, exchange offices, economists, savers, and so on can profit from trade weighted indices. Not sure if now is a good time to go to the Bank and buy foreign currency for you next trip? Want to save in foreign currency, but don’t know which? With TWIs you can !
TWIs can be an important tool for traders to conduct fundamental research in Forex trading. They filter out the direct dependence of a currency’s exchange rate on another exchange rate. This lets you assess the inner strength of each currency, and create a ranking of strong and weak currencies. Based on this information, you can take a more informed decision which currencies to buy and which to sell. For example, if the U.S. Dollar TWI looks strong, and the British Pound TWI looks weak, selling GBP/USD may turn out be a profitable trade.
However, there is not one single path to success in trading. How to assess past performance to predict future price movements is the holy grail of trading. Common strategies include to look for trends, patterns, and responses to news events. More particular strategies focus on fibonacci retracements or Elliot waves. Still more particular strategies look at seasons, moon phases or whatever comes to your mind. You need to develop your own strategy that you trust and feel comfortable trading. Be creative, but most of all, analyze, analyze, analyze! Start today and make and our real-time charts an integral part of your trading strategy.
If you’re new to trading, check out Babypips’ School of Pipsology and their Forex courses, especially the undergraduate sophomore chapter on the U.S. Dollar and other trade weighted indices.
At tradeweightedindex.com, we use a weighted geometric mean to calculate our TWIs from real time exchange rate data. As base period we use the 1st of January 2014, where all indices start with a value of 100.
To calculate the weights assigned to each currency we use the latest trade balances available from UN Comtrade. We consider total yearly imports and exports for both goods and services. The minimum contribution of any single trading partner to a country’s total trade volume is set at 0.1%. This leads to a broad basket of more than 60 contributing currencies for some indices, which covers over 98% percent of total trade volume and guarantees that our TWIs reflect the most realistic trade flows possible. We update our trade weights once per week, given that new trade balances are published, so that our TWIs always reflect the most up-to-date international trade flows.
As mentioned before, we consider a very large currency basket and update the weights assigned to each currency frequently, to always reflect the most up-to-date international trade flows. The U.S. Dollar Index (USDX), for example, uses only six major world currencies and does not update their weights, while its trade-weighted version published by the FED is re-weighted once a year and includes a smaller currency basket (roughly half) compared to our TWIs.
As close as it gets. We use realtime exchange rate data and process it to calculate TWIs as soon as it reaches our severs. However, network delays and lags may affect the realtime performance.
We are working on this feature. Coming soon.
Trade-weighted indices are an effective tool in measuring the exchange rate, as most international transactions entered into by countries are on account of trade. However, with the increase in globalization, the global economy is witnessing a rapid increase in capital flows. Thus, taking into account only trade flows can be an insufficient measure.
Apart from that, there is a chance of inaccurate measurement of the exchange rate on account of undervaluation of trade between countries. Some trade may go unaccounted for by Customs officials because traders try to evade duties on goods traded. This is a major drawback in the use of the trade-weighted indices.
Additionally, trade-weighted indices fall short by not taking into consideration the demand for some currencies as an international reserve asset.