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The Trade Weighted Index or Trade Weighted Exchange Index is an economic indicator used to compare an exchange rate again several other exchange rates. A country calculates the Trade Weighted Index by weighting exchange rates of its major trading partners. Each trading partner's currency weight is equal to its share in trade with this country. This means that trading partners with larger portion of the country economy's exports and imports have higher weights and therefore their currencies have more impact on the trade weighted index.
The U.S. trade weighted exchange index, which is released by the Board of Governors of the Federal Reserve System, compares the U.S. dollar against several currencies, including: Euro Area, Canada, Japan, Mexico, China, United Kingdom, Singapore, Indonesia, India, Brazil, Australia...
The Trade Weighted Index is downloaded from the Federal Reserve Bank of St.Louis website; the data is released daily and it spans from 1995 to present.
The currency weights used in the calculation of this index are based on annual trade data and are updated every year. The set of currencies may also change in the future to include new U.S. trading partners.
The Trade Weighted Index is also sometimes called the effective exchange rate. It is a better measure of a country's currency than comparing that currency with another one (For example, comparing the U.S. dollar with the Canadian dollar). The index increases when the currency is strengthening or appreciating (more purchasing power and a strengthening of the currency again those of the trading partners) and decreases when the currency is weakening.
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