Trade-Weighted Dollar
Categories: Econ, Forex, International
It doesn’t much matter what the U.S. dollar does against the Norwegian krone. Sure, Oslo is nice, and plenty of Minnesotans have distant cousins there. But in terms of global trade, the action between the two currencies...just doesn’t rank.
That situation happens for a lot of currencies. Most of them (in terms of global dollar trading) just don't matter much. For that reason, a broad dollar index, tracking the dollar’s general value against all the world’s currencies, wouldn't provide that much insight. Better to focus attention on heavy trade partners.
Which brings us to the trade-weighted dollar index. It provides a one-stop shop to track the value of the dollar, with the added benefit that components of the index (the other currencies) are weighted using international trade statistics. So action against the euro or the pound gets more weight than moves against the krone or the Polish zloty. Again, no shade to those countries. We hear Warsaw's almost as nice as Olso.
