The nominal effective exchange rate (NEER) of a national currency is a weighted average of nominal bilateral rates between the national currency and a basket of foreign currencies. It is an indicator of the external values of the national currency vis-à-vis the currencies of selected currency’s main trading partners.
For example, the nominal effective exchange rates of the euro are calculated by the European Central Bank and they are based on weighted averages of bilateral euro exchange rates against 19 main trading partners of the euro area.
If this index rate rises, this means that more foreign currency can be bought, on average, for a single unit of the analysed currency. It therefore becomes more expensive, on average, for those who want to exchange foreign currency for that currency. Likewise, if this index rate falls, less foreign currency can be bought, on average, for one unit of the benchmark currency and, in turn, it becomes less expensive to exchange foreign currency into the benchmark currency. The NEER is not only used to measure the current trading strenght of a domestic currency but also as a proxy to predict the future strenght of the currency. That is why it is often used by forex traders to formulate predictions.
In the NEER case, the average weights capture third-market effects and are based on trade in manufactured goods with the euro area’s main trading partners in the periods 1995-97, 1998-2000, 2001-03, 2004-06, 2007-09, 2010-12 and 2013-15, with the indices being chain-linked at the end of each three-year period.
The nominal effective exchange rates must not be confused with the real effective exchange rates, which are defined as a weighted average of a country’s currency against a basket of other major currencies, adjusted to the effects of inflation.