Further details about Effective Exchange Rates data

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Overview

An exchange rate index (ERI), also termed an effective exchange rate, is an overall measure of the exchange rate of a currency when measured against multiple other currencies.  This is in contrast to a bilateral exchange rate, which is the rate of one currency against one other currency.  An ERI is usually calculated as a weighted geometric average of the bilateral exchange rates used in the index and expressed in an index form relative to a reference period, for example, Jan 2005 = 100.  The choice of currencies in the index and their associated weights is usually determined according to the relative importance of the economy’s trade flows with other countries.  These choices can be revised over time to allow for changing patterns of trade.

Until the early 1970s, the Bretton Woods post-war system of fixed exchange rates meant that the dollar exchange rate of any currency would serve as a reliable measure of its level.  The dollar could in turn be regarded as fixed in terms of the $35/oz. official price of gold. But since that time, with floating exchange rates, using any one bilateral rate for a currency would give a possibly misleading indication of its overall level against other currencies.

The practical steps involved in determining the basket of exchange rates and their associated weights for use in an ERI can be surprisingly complicated. Firstly, it requires a choice of economic framework, such as international trade competitiveness, to determine which trade data should be used; secondly, the required data demands can be considerable, depending on the method chosen, and there may be known statistical issues, such as incompleteness, inconsistency or poor timeliness in the actual trade data which will require dealing with.  

Other practical considerations include: how many currencies to include in the ERI basket; how frequently to revise the weights; and how to revise existing data series when revised weights or new methods are adopted.  For these reasons, international institutions such as the International Monetary Fund (IMF) and the Bank for International Settlements (BIS) have mainly taken the lead in developing methodologies for exchange rate indices. But it should be noted that there is no official international standard governing the calculation of ERIs.  

The methods developed by the IMF and BIS take account not only of an economy’s bilateral exports and imports trade flows, but also of its competitiveness against all other economies in all world markets.  Implementing these methods can require considerable data demands. These are described at: T Bayoumi, J Lee and S Jayanthi 'New Rates from New Weights', IMF Working Paper WP/05/99, 1999 and M Klau and S Fung, “The new BIS effective exchange rate indices”, BIS Quarterly Review, March 2006, pp 51–65.  

In addition, many national central banks calculate an exchange rate index for their own currency, usually following a similar method to those of the IMF or BIS. The Bank of England has published ERI measures both for sterling and for other major currencies.

Bank of England ERI measures

The Bank of England has calculated and published daily data for ERIs for major international currencies, including sterling, since the 1970s. These data series have been periodically reviewed and updated at various points since then. Full details are available at the archived version of the Annual reweighting of the sterling ERI.

In 1995 the Bank of England introduced reformed calculations of ERIs, indexed to 1990 = 100, for some 21 major international currencies, including sterling, based on 1989 – 91 data for trade flows in manufactured goods. These data followed the IMF method. 

There is a trade-off between having a smaller or a larger number of currencies in an exchange rate index. Having more currencies means that the index can be more representative, but this can increase the risk that the ERI will reflect exchange rates against currencies from high-inflation economies with high rates of depreciation. As the ERI is often interpreted as a short term proxy measure for competitiveness, allowing the inflationary depreciation of one particular currency to affect the overall ERI has been regarded as undesirable. For this reason the Bank produces two sterling ERI indices:  the principal index is the narrow measure composed of currencies relating to economies with a minimum 1.0 pp share of UK imports or exports over the latest three-year period of data. The broad index is correspondingly defined, but with a minimum threshold of 0.5pp. 

Sterling ERI

On 1 May 2005 the Bank’s sterling ERI was again substantially reformed, using an approach designed to be a compromise between simplicity, so as to allow for regular re-weighting, and remaining close to the IMF method.  The new index, represented by a distinct new data series rebased to Jan 2005 = 100, incorporated a number of new features.  These included:  updated trade flows data including the addition of trade in services; a commitment to annual reweighting;  approximations to proxy for certain difficult to calculate parameters used in the IMF method;  and the introduction of two index calculations on a broad and a narrow basis.  The sterling ERI (1990 = 100) index was discontinued on 31 May 2006. A full explanation of the sterling ERI (Jan 2005 = 100) series can be found in B Lynch and S Whitaker’s ‘The new sterling ERI’, Bank of England Quarterly Bulletin Article, Winter 2004.

The current sterling ERI is annually re-weighted, but remains referenced to Jan 2005 = 100. Details of the latest annual sterling ERI re-weightings, including tables showing the evolution of these weights, can be found on the ‘Annual reweighting of the sterling exchange rate index’ page.

The sterling exchange rate index continues to be available at daily, monthly and quarterly frequencies, with index weights updated annually. 

Non-sterling ERIs

For currencies other than sterling, the 1990 = 100 data series were maintained (but not reweighted) until 2018.  The possibility of reweighting these data was considered by Lynch and Whitaker in 2004, but it was noted that the data demands of fully implementing the IMF method were considerable, and that not all the required data would be available to the Bank. As these data were not elsewhere publicly available on a daily frequency, it was considered that there continued to be a public interest in their production. In May 1999 the Bank introduced a euro ERI calculation on a 1990 = 100 basis, following the launch of the new currency on 1 January 1999.  See: R Cromb, ‘An effective exchange rate index for the euro area’, Bank of England Quarterly Bulletin Article, May 1999.

Following a review of the relevance of the 1990 = 100 ERIs for non-sterling currencies, the Bank took the decision to discontinue the publication of these series from 2 July 2018.  This decision reflected the fact that the currency weights for these data remained based on the 1989 – 91 trade flows data, and that there now existed an alternative publicly available data source for these ERIs, at daily frequency and with regularly updated currency weights, in the form of the BIS database. 

The discontinued series are:

XUDLUSG – Effective exchange rate index, US $ (1990 average = 100)
XUDLADG – Effective exchange rate index, Australian Dollar (1990 average = 100)
XUDLERG – Effective exchange rate index, Euro (1990 average = 100)
XUDLJYG – Effective exchange rate index, Japanese Yen (1990 average = 100)
XUDLNDG – Effective exchange rate index, New Zealand Dollar (1990 average = 100)
XUDLSFG – Effective exchange rate index, Swiss Franc (1990 average = 100)
XUDLNKG – Effective exchange rate index, Norwegian Krone (1990 average = 100) 
XUDLSKG – Effective exchange rate index, Swedish Krona (1990 average = 100)
XUDLCDG – Effective exchange rate index, Canadian Dollar (1990 average = 100)
XUDLDKG – Effective exchange rate index, Danish Krone (1990 average = 100)

Other data sources

As noted above, both the IMF and BIS maintain systems for ERI calculations for multiple exchange rates, including sterling. The IMF publish monthly data for its member country exchange rates in International Financial Statistics.

The BIS, as at 2018, calculate and publish ERI indices on a narrow basis for some 26 economies back to 1964, and on a broad basis for 61 economies back to 1994. Access to these data and references to their methods are publicly available on the BIS Database.  In 2016 the BIS introduced daily frequency, with full availability of back data.