Real Effective Exchange Rate

The real effective exchange rate is a weighted average of a country's currency value against a basket of other major currencies, adjusted for differences in relative consumer prices between countries. It is derived from the nominal effective exchange rate index by adjusting for relative inflation, with the weights typically based on each partner country's trade balance relative to the country being measured. An increase in the index indicates the currency has appreciated in real terms and that the country's international price competitiveness has fallen, making the real effective exchange rate an important tool for policymakers and economists assessing a country's trade competitiveness and exchange rate position.