A trade-weighted index measures a currency against a basket of trading partners rather than against one counterpart, with each partner weighted by its share of trade. The Reserve Bank of Australia calculates its index as a weighted geometric mean of currencies covering at least 90 per cent of Australia's two-way merchandise and services trade, based at May 1970 equal to 100, with weights updated annually and the index spliced at each change.
A single exchange rate answers a narrow question: what one currency is worth in terms of one other currency. That is often the wrong question. If the Australian dollar falls against the United States dollar, it may be because something happened in Australia, or because something happened in America and the dollar rose against everything. The bilateral rate cannot tell those apart.
A trade-weighted index is built to tell them apart.
What it is and how it is put together
The index measures a currency against a basket of trading partners, with each partner's currency weighted by its share of that country's trade. The Reserve Bank of Australia calculates and publishes its version at 4pm each business day.
The construction has three properties worth knowing.
Coverage. The basket is chosen to account for at least 90 per cent of Australia's two-way trade. Since 2011 that means merchandise and services trade; before then it was merchandise only. Partners too small to make the cut are excluded rather than approximated.
Method. It is a weighted geometric mean, which since 1988 has been the standard approach.
Base. May 1970 equals 100. That base has survived every methodology revision since, which is why the index remains comparable across more than half a century despite the method changing underneath it.
Weights are updated annually and the index is spliced at each weight change, so the series stays continuous rather than jumping when the basket is rebuilt. The euro's weight is based on trade with all euro area countries combined.
The index dates from September 1974, when it was decided the Australian dollar would be pegged to a basket of currencies. It was then backcast to May 1970 for the base period. It began, in other words, as an operational tool for running a peg, and outlived the peg by decades as a measurement.
Why the method changed in 1988, and why that is interesting
Until 1988 the index was a weighted arithmetic mean. In October 1988 it became a weighted geometric mean.
The Reserve Bank's stated reasons were that the change brought its calculation into line with standard international practice at the time and removed a slight upward bias. The bias is the part worth understanding, because it is a real and slightly counter-intuitive property of arithmetic averaging: under that method, currencies the Australian dollar was falling against had a diminishing effect on the index over time, while currencies it was rising against had an increasing one. The index therefore drifted upward for reasons that had nothing to do with the currency.
The same revision changed the basket's construction. Before 1988 it held 22 currencies, with small trading partners allocated to major currency groups on the basis of similar exchange rate experience. That practice was abandoned because currencies became more flexible and harder to group meaningfully.
The frequency of revision changed too. Before 1984 weights were revised sporadically, usually two or three times a year, and in 1975 they were not revised at all. From 1984 the revision became annual.
What the current basket looks like
The basket effective 7 January 2026 holds 19 currencies, based on Australia's merchandise goods and services trade for the 2024/25 financial year.
The Chinese renminbi carries much the largest weight at 27.6 per cent, followed by the United States dollar at 13.4 per cent, the Japanese yen at 9.0 per cent and the euro at 8.5 per cent. The South Korean won, Indian rupee, Singapore dollar, sterling and New Zealand dollar follow, with the Indonesian rupiah, Malaysian ringgit, Thai baht, New Taiwan dollar and Vietnamese dong all at 2.5 per cent or more. The Hong Kong dollar, Canadian dollar, Philippine peso, Swiss franc and Papua New Guinean kina complete it.
In that revision the renminbi's weight fell by about two percentage points while remaining the largest, and the United States dollar's rose by about two and a quarter percentage points into second place. The Papua New Guinean kina returned to the basket.
What twenty years of weights reveal
The most interesting thing about a trade-weighted index is not its level. It is that the weights themselves are a published record of who a country trades with, revised every year.
Comparing the basket effective October 2006 with the one effective January 2026 shows the change plainly.
| Currency | Oct 2006 | Jan 2026 |
|---|---|---|
| Chinese renminbi | 13.9% | 27.6% |
| Japanese yen | 16.3% | 9.0% |
| United States dollar | 11.0% | 13.4% |
| Euro | 12.2% | 8.5% |
| Indian rupee | 2.9% | 4.9% |
| UK pound sterling | 4.6% | 3.8% |
| Vietnamese dong | 1.7% | 2.5% |
| Basket size | 22 currencies | 19 currencies |
The renminbi has roughly doubled while the yen has roughly halved, and the largest weight changed hands between them. The euro and sterling have both fallen; the rupee and the dong have both risen.
The basket has also shrunk, from 22 currencies to 19, and its membership has turned over. The South African rand, Saudi riyal, Swedish krona and United Arab Emirates dirham have all dropped out since 2006. The Philippine peso was removed in that 2006 revision and has since returned, as has the Papua New Guinean kina, which held 1.25 per cent of the basket in 2006 before dropping out and coming back.
Currencies entering and leaving a trade basket is not a technicality. It is a country's trading relationships changing, recorded annually in a public document.
Nominal against real
The index described so far is the nominal one, and it reflects currency movements alone.
A real trade-weighted index is the product of the nominal exchange rate and relative price levels in each country. The Reserve Bank deflates the nominal index using consumer price indices, chosen because they are timely, similarly constructed across countries and available for many countries over long spans; for Australia the underlying index is adjusted for changes in indirect taxation.
The distinction matters because the two answer different questions. If the Australian dollar is unchanged against a trading partner's currency but Australian prices have risen faster than that partner's, Australian goods have become less competitive even though the currency has not moved. The nominal index shows nothing; the real index shows the change.
The Reserve Bank's own reasoning on why trade shares are the right weights is characteristically direct: for assessing competitiveness, the relative importance of a nation's trading partners seems an obvious choice.
What it is not
A trade-weighted index is an index, not a rate. There is no currency on the other side of it and nothing can be converted at it. Actual conversions always happen in a specific pair at that pair's own rate.
It also fluctuates less than any of its components, which is the point rather than a limitation. Movements in the component currencies frequently offset one another, so what remains is the trend against trading partners as a group rather than the idiosyncrasies of any one counterparty.
Where to look next
- Trade-weighted index - the term in glossary form.
- What happened when the Australian dollar was floated - the regime the index has measured since 1983, and what appreciation does.
- Currency appreciation - why a move against one currency and a move overall are different claims.
Sources
- Reserve Bank of Australia, TWI Method of Calculation - the September 1974 origin and the backcast to a May 1970 base of 100, the weighted geometric mean method and the at least 90 per cent coverage of two-way merchandise and services trade, the annual weight update and splicing, the euro weight covering all euro area countries, the full methodology history across the three periods, the October 1988 change to geometric averaging with the stated reasons and the explanation of the upward bias, the 22-currency pre-1988 basket and the abandoned practice of grouping small partners, and the revision frequency before and after 1984
- Reserve Bank of Australia, Weights for the TWI - the basket effective 7 January 2026, its 19 currencies and their individual weights, the basis in 2024/25 merchandise goods and services trade, and the changes in the renminbi and United States dollar weights and the return of the Papua New Guinean kina
- Reserve Bank of Australia, Media Release: Trade-weighted Index (29 September 2006) - the basket effective 3 October 2006, its 22 currencies and their weights including the Japanese yen, Chinese renminbi, euro, United States dollar, sterling, Indian rupee, Vietnamese dong and Papua New Guinean kina, and the removal of the Philippine peso in that revision
- Reserve Bank of Australia Bulletin, Measuring the Real Exchange Rate: Pitfalls and Practicalities (Luci Ellis, November 2001) - the real exchange rate as the product of the nominal rate and relative price levels, the use of consumer price indices as deflators and the reasons for that choice, the adjustment of the Australian index for indirect taxation, the distinction between what the nominal and real measures show, and the reasoning on trade shares as the appropriate weights
- Reserve Bank of Australia, Definitions and Sources, Exchange Rates - the annual recalculation of the weights from the previous fiscal year's merchandise goods and services trade
- Reserve Bank of Australia, Explainer: Exchange Rates and their Measurement - the definition of a trade-weighted index as the price of a domestic currency against a weighted basket, and the observation that such indices fluctuate less than bilateral rates because movements in component currencies often offset each other
- Reserve Bank of Australia, Exchange Rates Overview - the calculation and publication of the index at 4pm each business day
Not financial advice, and not a recommendation of any product or institution. Reviewed by the Tradergy editorial team, September 2026.
Common questions
What is the trade-weighted index?
A measure of a currency against a basket of trading partners rather than against a single other currency, with each partner weighted by its share of trade. The Reserve Bank of Australia's index covers currencies accounting for at least 90 per cent of Australia's two-way merchandise and services trade, and is calculated and published at 4pm each business day.
How many currencies are in the Australian basket?
Nineteen, in the basket effective 7 January 2026, based on merchandise goods and services trade for the 2024/25 financial year. The number changes: the basket effective October 2006 held 22 currencies. Any count needs a date attached to it.
How often are the weights updated?
Annually, and the index is spliced at each change so the series remains continuous. Before 1984 revisions were sporadic, usually two or three times a year, and in 1975 the weights were not revised at all.
What is the difference between a nominal and a real trade-weighted index?
The nominal index reflects currency movements alone. The real index is the product of the nominal exchange rate and relative price levels between countries, which the Reserve Bank calculates by deflating the nominal index using consumer price indices. The real measure shows changes in competitiveness rather than in the currency by itself.
Why do economists prefer it to a single exchange rate?
Because a single pair can mislead. A fall against one currency may say more about that currency than about the Australian dollar. A trade-weighted index averages across major trading partners, so movements in the component currencies partly offset each other and the overall trend against trading partners becomes visible.