Although typically the basket is trade weighted, there are others besides the trade-weighted effective exchange rate index.
Ho (2012) proposed a new approach to compiling effective exchange rate indices.
The US dollar is used for convenience, but, in principle, any other currency could be used instead without affecting the results.
The use of GDP weights has been found to be superior to direct trade weights since countries with bigger GDPs will tend to attract imports from other countries, both direct and indirect.
Value of the benchmark currency basket at time t = Σ (GDP weight of currency i(dated 2 years ago from year of time t)* normalized exchange rate of currency i against the US dollar at time t; Effective exchange rate of currency j = Normalized exchange rate of currency j against the US dollar/Value of the benchmark currency basket against US dollar[1] Archived 2019-02-07 at the Wayback Machine Ho's procedure allows effective exchange rate indices to be easily compiled for any country.