# Trade-weighted US dollar index

Jump to navigation Jump to search

The trade-weighted US dollar index, also known as the broad index, is a measure of the value of the United States dollar relative to other world currencies. It is a trade weighted index that improves on the older U.S. Dollar Index by using more currencies and the updating the weights yearly (rather than never). The base index value is 100 in March 1973.[1]

## History

The trade-weighted dollar index was introduced in 1998 for two primary reasons. The first was the introduction of the euro, which eliminated several of the currencies in the standard dollar index; the second was to keep pace with new developments in US trade.[2]

## Included currencies

In the older U.S. Dollar Index, a significant weight is given to the euro, because most U. S. Trade in 1973 was with European countries. As U. S. trade expanded over time, the weights in that index went unchanged and became out of date. To more accurately reflect the strength of the dollar relative to other world currencies, the Federal Reserve created the trade-weighted US dollar index,[3] which includes a bigger collection of currencies than the US dollar index. The regions included are:

## Mathematical formulation

### Based on nominal exchange rates

The index is computed as the geometric mean of the bilateral exchange rates of the included currencies. The weight assigned to the value of each currency in the calculation is based on trade data, and is updated annually (the value of the index itself is updated much more frequently than the weightings).[2] The index value at time ${\displaystyle t}$ is given by the formula:[2]

${\displaystyle I_{t}=I_{t-1}\times \prod _{j=1}^{N(t)}\left({\frac {e_{j,t}}{e_{j,t-1}}}\right)^{w_{j,t}}}$.

where

• ${\displaystyle I_{t}}$ and ${\displaystyle I_{t-1}}$ are the values of the index at times ${\displaystyle t}$ and ${\displaystyle t-1}$
• ${\displaystyle N(t)}$ is the number of currencies in the index at time ${\displaystyle t}$
• ${\displaystyle e_{j,t}}$ and ${\displaystyle e_{j,t-1}}$ are the exchange rates of currency ${\displaystyle j}$ at times ${\displaystyle t}$ and ${\displaystyle t-1}$
• ${\displaystyle w_{j,t}}$ is the weight of currency ${\displaystyle j}$ at time ${\displaystyle t}$
• and ${\displaystyle \sum _{j=1}^{N(t)}w_{j,t}=1}$

### Based on real exchange rates

The real exchange rate is a more informative measure of the dollar's worth since it accounts for countries whose currencies experience differing rates of inflation from that of the United States. This is compensated for by adjusting the exchange rates in the formula using the consumer price index of the respective countries. In this more general case the index value is given by:[2]

${\displaystyle I_{t}=I_{t-1}\times \prod _{j=1}^{N(t)}\left({\frac {e_{j,t}\cdot {\frac {p_{t}}{p_{j,t}}}}{e_{j,t-1}\cdot {\frac {p_{t-1}}{p_{j,t-1}}}}}\right)^{w_{j,t}}}$.

where

• ${\displaystyle p_{t}}$ and ${\displaystyle p_{t-1}}$ are the values of the US consumer price index at times ${\displaystyle t}$ and ${\displaystyle t-1}$
• and ${\displaystyle p_{j,t}}$ and ${\displaystyle p_{j,t-1}}$ are the values of the country ${\displaystyle j}$'s consumer price index at times ${\displaystyle t}$ and ${\displaystyle t-1}$

## Federal Reserve Bank of St. Louis data

The Federal Reserve Bank of St. Louis, provides "weighted averages of the foreign exchange value of the U.S. dollar against the currencies of a broad group of major U.S. trading partners" with detailed information. The "broad currency index includes the Euro Area, Canada, Japan, Mexico, China, United Kingdom, Taiwan, Korea, Singapore, Hong Kong, Malaysia, Brazil, Switzerland, Thailand, Philippines, Australia, Indonesia, India, Israel, Saudi Arabia, Russia, Sweden, Argentina, Venezuela, Chile and Colombia."[4]

This table shows some highs and lows of the Trade Weighted U.S. Dollar Index: Broad [TWEXB] from 2002 to April 2017.[4]

Sample of trade weighted averages of foreign exchange value USD (highs/lows ) DMY [4]
20-02-2002 09-04-2008 23-07-2011 27-07-2011 18-03-2015 03-06-2015 17-02-2016 04-05-2016 26-08-2016 23-11-2016 04-01-2017 19-04-2017
129.3639 95.6084 102.1682 94.0323 117.4927 115.5347 123.7823 118.6478 120.2955 127.2899 128.5246 124.0479

## References

1. ^ "Trade Weighted U.S. Dollar Index". Retrieved 27 April 2015.
2. ^ a b c d Loretan, Mico (Winter 2005). "Indexes of the Foreign Exchange Value of the Dollar" (PDF). Federal Reserve Bulletin.
3. ^ http://www.federalreserve.gov/RELEASES/h10/Summary/
4. ^ a b c Trade Weighted U.S. Dollar Index: Broad [TWEXB], Board of Governors of the Federal Reserve System (US), Federal Reserve Bank of St. Louis (FRED), April 27, 2017, retrieved April 28, 2017