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What is a Currency Basket?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 09 November 2016
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    2003-2016
    Conjecture Corporation
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Currency baskets are collections of securities with a weighted average that can be utilized to calculate the current value of any given debt, duty, or written promise. Securities of this type may also be used to determine the current value of a currency that is different from the currency involved with the security under consideration. Generally, the use of a currency basket to evaluate the current value of a currency will involve considering several different currencies in order to obtain an average performance value over a broader scope.

The use of a currency basket can be very important for investors who wish to deal with currency exchange as a way of increasing their net worth. In general, the process of evaluating one currency against a different currency is known as pegging. For example, an investor may choose to compare the current value of the United States dollar to the Euro. While this approach works well when considering an exchange that only involves these two currencies, it does not address the possible advantages in exchanging one base currency for several different currencies. With a currency basket, the comparison is broader and thus may yield two or more possible approaches to the execution of a Forex order.

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A currency basket can also be an important factor for the countries who issue currency as well. Pegging the currency by comparing the current rate of exchange with several different prominent and desirable currencies can provide a lot of insight into all sorts of important aspects. Through the application of the currency basket approach, it is possible to get some perspective on the general opinion of a country, its political situation, and the willingness of other countries to do business with the nation in question.

Dealers who advise investors on currency trading and who often place the orders on behalf of investors will also play close attention to the current status of a currency basket composed of major currencies from around the world. The relationship between the currencies in a given currency basket can provide some valuable clues about future movements, which in turn will help investors side step deals that are not likely to pan out.

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