What is a Currency Basket?
A basket of currencies refers to a foreign currency combination that is used as a reference for setting exchange rates. The proportion of a foreign currency in the combination is usually based on the importance of the foreign currency in the country's international trade. It is divided into multiple currencies. A group of currencies made up of a certain proportion. For example, if 40% of a country s imports and exports are denominated in US dollars, the dollar s weight in a country s basket of currencies may be 40%.
Basket of currencies
- The reference to a basket of currencies means that a country chooses several major currencies according to the closeness of trade and investment. Different currencies have different settings.
- Since 2013, China has emphasized that the RMB exchange rate should refer to a basket of currencies. The exchange rate reform in 2005, continued to promote the exchange rate reform after the easing of the international financial crisis in 2010, the improvement of the central parity rate of the RMB exchange rate in August 2015, and the launch of the three major RMB exchange rate indices in November 2015, all proceeded in accordance with this established thinking To make reference to a basket of currencies more transparent, regular and predictable. [1]
- A basket of currencies is a compound currency that combines the existing set of currencies according to a certain method. A basket of currencies is not a realistic currency, it is just a unit of account and a standard of valuation. It is used by some countries
- Most domestic literature and scholars have a misunderstanding that the weight of various currencies contained in a basket of currencies is constant. This is not the case. The number of basket currencies is fixed and will only change when the weights are adjusted once. The determination of weights is only one step in the construction of a basket of currencies. The purpose is to determine the amount of basket currencies. In operation, weights change with changes in market exchange rates.