Currency Basket Definition and Quiz

1. Define - Define the term Currency Basket.
2. Context - Use Currency Basket in a sentence.
3. Quiz - Test yourself.

by Paul Alan Davis, CFA

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Currency Basket for Forex Benchmarking

Intermediate

Currency Basket is a financial benchmarking tool used to measure the forex trading performance of one currency against a group of other currencies over differing periods of time. Other currencies are held as percent weights of sometimes 6 to 20 other currencies. These weights may be based on a country's GDP or on an equal-weight basis, but are often customized to the user's needs. Besides performance measurement Currency Baskets are used in risk-management and trading applications.

Synonyms: currency index, forex benchmark

For context, the U.S. Dollar Index®, developed by Intercontinental Exchange, Inc., is one of a number of Currency Baskets. It measures the performance of the USD currency against a basket of several of its largest trading partners; specifically, British Pound, Canadian Dollar, EU Euro, Swedish Krona and Swiss Franc. Weights for this version range from 3% to 58% and, like others, prices can be found using a ticker (USDX) on exchanges and pricing services.

The International Monetary Fund (IMF) utilizes currency baskets for units of account for member countries in forex instruments called Special Drawing Rights, or IMF SDR.

In a Sentence

Liz:  Did you see how well the USD held up against the Swiss Franc this quarter? Our clients will love us.
Eve:  Yeah, but the dollar lost 7% against our currency basket.

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