Prerequisite: Currency correlations and relative exposure
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Read the figure
Both EUR and GBP rise against USD, but EUR falls against GBP because GBP rises proportionally more.
Learning objective
Define what a strength score measures before comparing currencies.
A currency is strong only relative to a stated reference. A score based on several pairs needs an explicit basket, weights, lookback and timestamp. An EUR/USD rise does not prove that EUR strengthened against every currency.
Quote direction must be consistent. For a USD basket, USD/JPY already expresses USD as base; EUR/USD must be inverted. A simple sign flip approximates small percentage moves, while inverse log returns change sign exactly.
Use aligned observations and disclose missing pairs. A daily reference-rate basket is not a live executable quote. Changes in basket membership can change a score even if the underlying price moves are unchanged.
Worked example
If EUR/USD rises 1% and GBP/USD rises 2%, EUR/GBP changes by 1.01/1.02−1≈−0.9804%. Both currencies can strengthen against USD while EUR weakens against GBP.
Common mistakes
Do not label an undefined score live or globally representative.
Practice
Choose a three-pair basket and document weights, quote inversions and the observation period.
Sources & further reading
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My learning pathEditorial review: 15 October 2026 · AI-assisted technical review; independent specialist review pending.
Translation available · editorial review pending