Question

1. Suppose that the U.S. dollar has appreciated relative to the Chinese yuan and depreciated relative to the Mexican peso. Assume that the U.S. trades more with Mexico than with China. What has happened to the value of the dollar based on the effective exchange rate? How is your answer based on the relative importance of U.S. trade with China and Mexico? Explain.

Answer 1

The effective exchange rates compare a currency to a basket of other country's currencies and basket for a currency is decided by their major trading partner and weight given to other country's currencies reflect the relevance of trade of these countries to the home country.

so if the dollar appreciates relative to Chinese yuan and depreciates relative to Mexican peso and Mexico is a major trading partner of US so US dollar depreciates on the effective exchange rate.