Inside the Currency Market: Mechanics, Valuation, and Strategies

Conclusion

Effective exchange-rate indices and effective exchange rates are just another means to trade spot currencies. The only difference is the index, but a currency price factored within an index may prove to be a more powerful indicator as to direction of a particular pair because it is gauged against other currencies in the index. Each nation has various factors to achieve its desired trade and currency price goals due to the uniqueness of each nation. Indices are constructed to reflect the economic parameters of each nation's trade circumstances.