BIS expands, updates exchange rate indices

LONDON, Mar 5 (Reuters) The Bank for International Settlements said on Sunday it had expanded its exchange rate indices to include more emerging market countries and changed its calculations to reflect changes in world trade more accurately.

The Basel-based BIS has increased its effective exchange rate (EER) indices, which measure a currency's performance against a weighted basket of its trading partners, to 52 economies from 27 ''to reflect the rising importance of the emerging market economies in Asia, central and eastern Europe and Latin America'', the bank said in a quarterly report.

The countries covered by the new indices represented 93 percent of total world trade in 2004, the BIS added.

The new indices more closely reflect recent developments in global trade by using trade data based on an average over a three-year period. The data used will be updated on a three-yearly basis.

The original weighting system of the EER indices was based on 1990 trade flows.

''Rapid developments in the global trade arena over the last decade... have made it necessary to expand the coverage and review the trade weights,'' the BIS, a forum of central banks, said.

The BIS is also altering its indices to take more account of trade with China.

''A substantial portion of China's external trade takes place in the form of exports via Hong Kong and official trade statistics of China and its trading partners do not consistently take this into account.'' The BIS said the changes would likely increase the weighting of China in the EER indices and decrease that of Hong Kong, and would be better able to capture any divergence between the Chinese yuan and the Hong Kong dollar.

''The likelihood of this has increased since the Chinese authorities adopted the new exchange rate regime in July 2005.'' The BIS said its new ''broad'' indices would be publicly available on its website for the first time. The existing ''narrow'' indices for 27 economies, based on a reduced basket, will also be maintained.

''The broad indices give a more global picture by taking the emerging market economies into account. As a result, they would be more useful in analyses of issues such as the sustainability of the external trade balances,'' the bank said.

Other central banks such as the U.S. Federal Reserve, Bank of Japan, Bank of England (BoE) and European Central Bank also publish exchange rate indices. The BoE changed the calculation of its sterling trade-weighted index in April 2005, to reflect changing trade patterns.

The BIS said its broad indices for the dollar, euro and yen closely tracked the official series of the Fed, ECB and BOJ.

REUTERS VJ RAI0211