Real Effective Exchange Rate
Real Effective Exchange Rate — Trade-weighted currency adjusted for inflation differentials.
Definition
Real Effective Exchange Rate refers to trade-weighted currency adjusted for inflation differentials. Keep that definition fixed when comparing series, managers, or regimes — renaming the same tape does not create a new signal.
Why it matters
FX clears cross-border funding and relative growth; dislocations show up here early. When trade-weighted currency adjusted for inflation differentials shifts, related hedges, limits, and narratives usually need an explicit update rather than a quiet assumption.
Case
Suppose a desk is positioned for the opposite of what real effective exchange rate is saying. If trade-weighted currency adjusted for inflation differentials moves against that book, the first question is not “is the story clever?” but whether size, hedges, and stop logic still match the observation.
How to read it
Check basis, intervention risk, and rate differentials — spot alone is incomplete. Prefer a short written null hypothesis for Real Effective Exchange Rate: what would falsify the current reading in the next window?