# Understanding the Nominal Effective Exchange Rate (NEER) and Its Importance

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> **Definition**
>
> The nominal effective exchange rate (NEER) reflects the amount of domestic currency that's needed to purchase foreign currency.

## What Is the Nominal Effective Exchange Rate (NEER)?

The nominal effective exchange rate (NEER) is the average value of a currency compared to other major currencies in an index. It's an unadjusted [weighted average](https://www.investopedia.com/terms/w/weightedaverage.asp) value. 

The NEER functions as an economic indicator of a country's competitiveness in the foreign exchange (forex) market. It's the amount of domestic currency needed to purchase foreign currency.

The nominal effective exchange rate can be adjusted to compensate for the [inflation](https://www.investopedia.com/terms/i/inflation.asp) rate of the home country relative to the inflation rate of its trading partners. The resulting figure is the real effective exchange rate (REER).

Unlike nominal exchange rates, the NEER is not calculated separately for each currency. An index number shows how a domestic currency's value compares against various foreign currencies.

The NEER has utilization in policy analysis, trade, and forex trading. Forex traders may call the NEER the trade-weighted currency index.  

### Key Takeaways

*   The NEER is an economic indicator of a nation's forex market competitiveness.
*   It measures the relative value of a currency against a basket of foreign currencies.
*   NEER adjustments can account for differences in inflation rates between countries.
*   Forex traders use the NEER to understand currency strengths and make trading decisions.
*   The NEER can indicate if a domestic currency appreciates or depreciates against other currencies.

## Understanding What the NEER Reveals About Currency Value

The NEER describes only relative value. It can't definitively show whether a currency is strong or gaining strength in real terms. It only describes whether a currency is weak or strong or weakening or strengthening compared to foreign currencies. The NEER can help identify which currencies store value more or less effectively. Exchange rates influence where international actors buy or sell goods.

The NEER is used in economic studies and for policy analysis on international trade. It's also used by forex traders who engage in currency [arbitrage](https://www.investopedia.com/ask/answers/what-is-arbitrage/). The Federal Reserve calculates three NEER indexes for the United States: the broad index, the Advanced Foreign Economies (AFE), and the Emerging Market Economies (EME).

## How Foreign Currencies Are Weighted in the NEER

Each NEER compares one currency against a basket of foreign currencies. The basket is based on the domestic country's key trading partners and other major currencies.

> **Important**
>
> The world's top five major currencies are the U.S. dollar, the British pound, the Euro, the Japanese yen, and the Swiss franc.

The foreign currencies' values are weighted by their trade value with the domestic country. This might include export value, import value, or the combined value of both. The weights often relate to the [assets](https://www.investopedia.com/terms/a/asset.asp) and [liabilities](https://www.investopedia.com/terms/l/liability.asp) of different countries.

A higher NEER co-efficient above one means that the home country's currency is usually worth more than an imported currency. A lower co-efficient below one means that the home currency is usually worth less than the imported currency.

No international standard exists for selecting a currency basket. The Organisation for Economic Co-operation and Development (OECD) basket is different from the baskets of the International Monetary Fund (IMF), the Federal Reserve, or the Bank of Japan. Many institutions rely on the International Financial Statistics (IFS) published by the IMF, however.

## What Is the Trade-Weighted Exchange Rate?

The trade-weighted exchange rate measures a country's currency exchange rate by incorporating the trades it enters into with other countries. It's a complicated equation because it inputs the weights of shares of the currencies of other countries that each country trades with.

## Can the NEER Change Through Appreciation or Depreciation?

The NEER is said to appreciate if a domestic currency increases against a [basket](https://www.investopedia.com/terms/b/basket.asp) of other currencies inside a floating exchange rate regime. The NEER depreciates if the domestic currency falls against the basket.

## What Is the Strongest Currency in the World in 2025?

Forbes Advisor gives the honor to the Kuwaiti dinar. One U.S. dollar equaled 0.31 dinar as of January 2025. The British pound came in fifth place, and the U.S. dollar was 10th at that time.

## The Bottom Line

The nominal effective exchange rate (NEER) is a key economic indicator for assessing international competitiveness by comparing a domestic currency against a basket of foreign currencies.

The NEER provides insight into the relative strength or weakness of a currency, but it does not measure absolute strength or weakness. It's often used alongside the real effective exchange rate (REER) to adjust for inflation differences between countries.

The nominal effective exchange rate has practical applications in economic studies, policy analysis, and foreign exchange (forex) trading. Traders can use the NEER to identify if a currency is strengthening or weakening against that of its trade partners, and policymakers can use the NEER to strengthen or weaken the currency and the exchange rate to achieve economic goals.

Before using the NEER for investing or trading decisions, consult with an [expert forex broker](https://www.investopedia.com/best-brokers-for-forex-trading-4587882) or a financial advisor to navigate the complexities of the forex market.

> **Article Sources**
>
> 1.  Board of Governors of the Federal Reserve System. "[Foreign Exchange Rates—H.10](https://www.federalreserve.gov/releases/h10/current/)."
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> 2.  Market Business News. "[What Are the Major Currencies? Definition and Examples](https://marketbusinessnews.com/financial-glossary/major-currencies/)."
>     
> 3.  CFI Education. "[Trade-Weighted Exchange Rate](https://corporatefinanceinstitute.com/resources/economics/trade-weighted-exchange-rate/)."
>     
> 4.  Forbes Advisor. "[Top 10 Strongest Currencies in the World in January 2025](https://www.forbes.com/advisor/money-transfer/highest-currencies-in-the-world/)."