Currency basket

From Wikipedia, the free encyclopedia
Jump to navigation Jump to search

A literal basket of currency.

A currency basket is a portfolio of selected currencies with different weightings.[1] A currency basket is commonly used to minimize the risk of currency fluctuations.[2] Another purpose is setting the market value of a currency.[3]

An example of a currency basket is the European Currency Unit that was used by the European Community member states as the unit of account before being replaced by the euro.[4] Another example is the special drawing rights of the International Monetary Fund.[5][6]

A well-known method is the US dollar index, which is used by Forex traders. There are six currencies forming the index: five major currencies (Euro, Japanese yen, British pound, Canadian dollar, and Swiss Franc), and Swedish krona.[7]

How it works[edit]

The currency basket can be used to avoid high currency volatility.[7] Forex trading is based on the opposition of one currency against another. Thus, a big jump of either currency can create unpleasant circumstances for the trader. If a Forex investor chooses to trade the USD against many other currencies, they should use the US dollar index. Traders can compose their own baskets with different weights and apply them to any trading strategy.[7]

See also[edit]

References[edit]

  1. ^ "currency basket". Oxford Reference. doi:10.1093/oi/authority.20110803095653851. Retrieved May 21, 2020.
  2. ^ "Currency Basket". Investopedia. Retrieved September 18, 2010.
  3. ^ "Currency basket". TheFreeDictionary.com. Retrieved May 21, 2020.
  4. ^ Kent, Penelope (2008). Law of the European Union. Pearson Education. p. 258. ISBN 978-1-4058-3526-8. Retrieved September 19, 2010.
  5. ^ "Factsheet -- Review of the Special Drawing Right (SDR) Currency Basket". www.imf.org. Retrieved May 21, 2020.
  6. ^ "What is the IMF's currency basket?". World Economic Forum. Retrieved May 21, 2020.
  7. ^ a b c Ganti, Akhilesh. "Currency Basket Definition". Investopedia. Retrieved May 21, 2020.