A currency index reading of 120 can look like a verdict that a currency is twenty percent too expensive. That interpretation confuses an index base with fair value. The Bank for International Settlements publishes effective exchange rate indices with 2020 equal to 100; the number measures a change from the base period, not distance from an equilibrium price. BIS Data Portal: Effective exchange rates, methodology and interpretation
Follow the evidence
Trace how the event could reach markets, then inspect a competing explanation.
Compare explanations
Switch lenses to see what each account explains—and what remains uncertain.
WFN analysis: imagine an index rising from 100 to 120 and then returning to 108. The first change is a 20% increase. The second is a 10% decline from 120, leaving the index 8% above its original base. These are hypothetical index values. They illustrate why percentage changes require a stated denominator rather than subtraction of index points alone. Rebasing that same illustrative series to 100 at the middle observation would change its displayed levels to approximately 83.33, 100 and 90. The economic movement between observations would remain the same. A level crossing 100 after rebasing cannot suddenly make a currency undervalued or overvalued; it only reflects the chosen reference period. A basket view can also disagree with a bilateral headline. A currency might weaken against one counterpart while strengthening against several others. The effective index summarises the weighted combination, so it need not follow the direction of the most frequently discussed pair. That is a reason to identify the measure, not a reason to dismiss either observation.
WFN analysis: imagine an index rising from 100 to 120 and then returning to 108. The first change is a 20% increase. The second is a 10% decline from 120, leaving the index 8% above its original base. These are hypothetical index values. They illustrate why percentage changes require a stated denominator rather than subtraction of index points alone. Rebasing that same illustrative series to 100 at the middle observation would change its displayed levels to approximately 83.33, 100 and 90. The economic movement between observations would remain the same. A level crossing 100 after rebasing cannot suddenly make a currency undervalued or overvalued; it only reflects the chosen reference period. A basket view can also disagree with a bilateral headline. A currency might weaken against one counterpart while strengthening against several others. The effective index summarises the weighted combination, so it need not follow the direction of the most frequently discussed pair. That is a reason to identify the measure, not a reason to dismiss either observation.
A chart caption should identify whether the index is nominal or real, broad or narrow, and which base period is used. Comparisons between countries need consistent series choices. Mixing a real index for one economy with a nominal index for another introduces an inflation adjustment on only one side, making the apparent ranking harder to interpret. Claims about fair value require an additional model and explicit assumptions about equilibrium, productivity, external balances or other relevant factors. An effective exchange rate series can be an input to such work, but its base year does not supply the conclusion. For readers, the practical first question is what changed and against which basket; the valuation argument comes afterwards.
Nominal and real indices answer different questions
A nominal effective exchange rate combines bilateral exchange rates using trade weights and a geometric average. The real measure adjusts the nominal index for relative consumer prices. An increase indicates appreciation in the corresponding nominal or real measure. The real adjustment does not turn the series into a trading recommendation or a standalone estimate of mispricing. BIS Data Portal: Effective exchange rates, methodology and interpretation
The BIS broad basket covers 64 economies. Its weighting methodology uses manufacturing trade and accounts for both direct trade and competition in third markets, with weights changing over time. A broad basket is therefore different from a single dollar pair, and the composition of the measure matters when interpreting its movement. BIS Data Portal: Effective exchange rates, methodology and interpretation
Read the scale before drawing a conclusion
WFN analysis: imagine an index rising from 100 to 120 and then returning to 108. The first change is a 20% increase. The second is a 10% decline from 120, leaving the index 8% above its original base. These are hypothetical index values. They illustrate why percentage changes require a stated denominator rather than subtraction of index points alone.
Rebasing that same illustrative series to 100 at the middle observation would change its displayed levels to approximately 83.33, 100 and 90. The economic movement between observations would remain the same. A level crossing 100 after rebasing cannot suddenly make a currency undervalued or overvalued; it only reflects the chosen reference period.
A basket view can also disagree with a bilateral headline. A currency might weaken against one counterpart while strengthening against several others. The effective index summarises the weighted combination, so it need not follow the direction of the most frequently discussed pair. That is a reason to identify the measure, not a reason to dismiss either observation.
Make historical currency comparisons reproducible
A chart caption should identify whether the index is nominal or real, broad or narrow, and which base period is used. Comparisons between countries need consistent series choices. Mixing a real index for one economy with a nominal index for another introduces an inflation adjustment on only one side, making the apparent ranking harder to interpret.
Claims about fair value require an additional model and explicit assumptions about equilibrium, productivity, external balances or other relevant factors. An effective exchange rate series can be an input to such work, but its base year does not supply the conclusion. For readers, the practical first question is what changed and against which basket; the valuation argument comes afterwards.