The Trade Weighted Index, also known as the effective exchange rate, is a multilateral exchange rate which is a weighted average of exchange rates of home and foreign currencies, with the weight for each foreign country equal to its share in trade. It measures the average price of a home good relative to the average price of goods of trading partners, using the share of trade with each country as the weight for that country.
The trade weighted index is an economic instrument used by economies to compare their exchange rate against those of their major trading partners. Those trading partners that constitute a larger portion of an economy's exports and imports receives a higher index. The trade weighted index is used to make a complete comparison between one economy's currency and other currencies it interacts with. It is a much more comprehensive analysis than comparing two currencies, for example, the Australian dollar and the United States dollar.
The interpretation of the effective exchange rate is that if the index increases, the purchasing power of that currency is higher (the currency strengthened against those of the country's or area's trading partners). A lower index means that the currency depreciated (devaluation) so that you need more of that currency to pay for imports.