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What is a currency basket?

What is a currency basket?

Currency baskets are composed of weighted amounts of certain currencies.

The most common use of a currency basket is as a benchmark for certain economic analysis, but it can also be used as a unit of account where an international organization has constituents that use various currencies. A basket of currencies is a weighted index of various currencies which serves a specific purpose as a benchmark or as a unit of account.

The International Monetary Fund (IMF), for example, uses a currency basket known as SDR (Special Drawing Rights) or XDR, which is their unit of account, meaning that they basically have their own currency which is comprised of other currencies. The XDR can actually be exchanged for Euros, Yen, Pounds, or Dollars, but may take several days to exchange, according to the IMF.

Currency baskets can also simply be used for benchmarking and informational purposes. Currency baskets have been used as predecessors that transition a regional economy into the use of a common currency, such as the Euro, which was preceded by the European Currency Unit, a currency basket.

Today, some transactions in Asia depend on the Asian Currency Unit, a basket which may one day be replaced by an Asian currency.

Keywords: currencies, benchmark, monetary policy, #Forex, international investment banks, International Monetary Fund, Europe, Asia, unit of account,