The trade-weighted dollar is an index created by the FED to live the worth of the USD, supported its competitiveness versus trading partners.
The trade-weighted dollar is employed to work out the U.S. dollar purchasing value, and to summarize the consequences of dollar appreciation and depreciation against foreign currencies. When the worth of the dollar increases, imports to the U.S. become less expensive, while exports to other countries become costlier.
A trade-weighted dollar may be a measurement of the exchange value of the U.S. dollar compared against certain foreign currencies. Trade-weighted dollars give importance, or weight, to currencies most generally utilized in international trade, instead of comparing the worth of the U.S. dollar to all foreign currencies. Since the currencies are weighted differently, changes in each currency will have a singular effect on the trade-weighted dollar and corresponding indexes.
Calculation of Trade-Weighted Exchange Rate:
- Include the currency of the highest five countries with which a rustic maintains maximum trade relations. In the case of latest Zealand, this may be Australia, Japan, USA, the UK, and Germany.
- Weights are assigned to every country counting on the extent of its trade with New Zealand.
- The index is calculated as the geometric mean, using the following formula: