Examining the Polish zloty’s strength using trade-weighted exchange rates

Poland's central bank held rates steady this week, continuing its reluctance to join the eurozone in loosening monetary policy. Its stance has helped boost the zloty lately – and, by trade-weighting the exchange rate, we can see how Warsaw's hawkish policy makers have helped support the currency throughout the renewed "King Dollar" environment of 2024.

Trade-weighted exchange rates (also known as the nominal effective exchange rate, or NEER) allow economists to strip away the effect of the outsized strength of the dollar in global currency markets, gaining a more holistic perspective on an economy's interdependence with major trading partners. In Poland's case, its most important trade relationship by far is with the eurozone.

As our chart shows, the zloty has depreciated about 2.5% against the dollar this year. But on a trade-weighted basis, the Polish currency has appreciated about 1.2% since the beginning of 2024. Over the longer term, our chart demonstrates how the zloty began "outperforming" its dollar exchange rate in NEER terms from early 2022, when the Federal Reserve began the inflation-fighting rate-hiking cycle that sent the dollar higher against almost all currencies. (This relationship was reversed during much of the ultra-stimulative policy of the pandemic period.)

As our final chart shows, inflation has come down to the central bank's target range. However, policy makers remain concerned about price pressures; the government is set to wind down temporary measures that shielded consumers, including a cap on household energy prices. In this environment, the central bank has said it would welcome zloty strength.

CEIC provides NEER for the zloty in daily frequency. This gives our users an edge, as the Bank of International Settlements calculates this figure only monthly – and publishes it three weeks after the month in question has ended. The euro has a weight of 56% in the zloty's NEER calculation, followed by the Chinese renminbi (13.8%) and the dollar (5.2%).

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