You check EUR/USD before a trip to New York. The rate looks about the same as last month, so you assume the euro is doing fine.
But over the same period the euro could have lost ground against the British pound, the Swiss franc and the Japanese yen. Then the real question is whether the euro is stable or the dollar is simply just as weak.
An exchange rate can't tell you, because it only compares two currencies. Currency strength compares one currency with all the others at once.
What is currency strength?
A currency strength index measures how one currency performs against a basket of currencies. Instead of EUR/USD alone, you see the euro against USD, GBP, CHF, JPY, CAD, AUD and the rest together.
The result is one number that tells you whether a currency is broadly getting stronger or weaker.
On the FX Compass dashboard, a value above 100 means the currency has strengthened since the start of the selected period. Below 100 means it has weakened.
When your currency gets stronger
A stronger home currency makes your money go further abroad. The hotel in Bangkok, the rental car in California and the espresso in Rome all get relatively cheaper. Subscriptions priced in USD or EUR cost you less in real terms, and so do imported electronics, clothes and other goods.
Here's an illustration. Say the Swedish krona (SEK) strengthened by 8% against most major currencies over six months. A Swedish freelancer who earns in kronor and spends part of that income abroad has effectively had an 8% raise, with no change to their pay.
When your currency gets weaker
A weaker currency works the other way. Your money buys less abroad, so the holiday costs more than you planned. Import prices creep up, including for domestic products made with imported materials. Debt in a foreign currency gets more expensive, which matters for countries and companies that borrow in USD.
Why the index beats a single exchange rate
In the second quarter of 2017 the Polish zloty (PLN) ended exactly where it started against the euro. Anyone watching PLN/EUR would have concluded that nothing happened.
The index says otherwise. That quarter the zloty gained 3.1% against the basket: about 3% against the British pound, 2% against the Swiss franc and close to 7% against the US dollar and the yen. The euro gained just as much, which is why PLN/EUR stayed flat and hid the zloty's rise.
Watch only the pair and you miss all of that.
Using FX Compass for everyday decisions
- Before a trip, look at your home currency's trend over the last one to three months. If it's rising, the trip will cost less than the exchange rate alone suggests.
- If you earn in one currency and spend in another, track the gap between the two. When it widens, your real income is changing, which is worth knowing before a salary negotiation.
- Before a big purchase, such as a car imported from Germany, check whether the euro is weakening. Waiting a few weeks might get you a better price.
- If you keep savings in USD or CHF, the index shows whether those savings are gaining or losing value against the basket.
Open FX Compass and select your home currency plus the ones you care about most. The chart shows the whole picture straight away.
See it in action
These links open the dashboard with the currencies already selected:
- Five major currencies over one year
- EUR, USD and GBP over the last three months, handy when planning a trip
- PLN and SEK against EUR and USD over six months
Exchange rates are useful, but they show one pair at a time and that can mislead. A strength index shows how your money is doing against the rest of the world, which is what you need when you plan travel, savings, contracts and everyday spending.