The Dollar Index is an index that measures the strength of the U.S. dollar relative to six other currencies. In the financial market, the U.S. dollar index, US Dollar index, DXY, USDX and DX (trading code in the futures market) are all collective names for this composite value. Currently, the combination of the Dollar Index includes the Euro, Japanese Yen, British Pound, Canadian Dollar, Swedish Krona and Swiss Franc. However, in fact, when the Dollar Index was established, the Euro had not yet been launched. At that time, the German (West German) Mark, Italian Lira, French Franc, Dutch Guilder and Belgian Franc were also included in this basket of currencies, a total of 10 currencies.

History of the US Dollar Index

The US dollar has been facing great depreciation pressure due to trade imbalances since World War II. There have been four US dollar crises, and the Bretton Woods monetary system has failed, which led to the major Western countries abandoning the fixed exchange rate system and implementing a floating exchange rate system. In March 1973, the US dollar index was launched, and the index was 100 at that time. The currencies in the index correspond to countries that have close trade relations with the United States, thus reflecting the changes in the export competitiveness and import costs of the United States, which is convenient for reference.

Calculation of the US Dollar Index

The US dollar index is calculated based on a geometric weighted average. Currently, the euro (57.6%) accounts for the largest proportion, followed by the Japanese yen (13.6%), the British pound (11.9%), the Canadian dollar (9.1%), the Swedish krona (4.2%) and the Swiss franc (3.6%). The formula is:

DXY = 50.14348112 (fixed) × EURUSD ^-0.576 × USDJPY ^0.136 × GBPUSD ^-0.119 × USDCAD ^0.091 × USDSEK ^0.042 × USDCHF ^0.036

Advantages and Disadvantages of the US Dollar Index

Since the US dollar index has not been adjusted for many years and has not been adjusted regularly, the euro still accounts for a considerable proportion, nearly 60%. Therefore, the fluctuation of the euro has the greatest impact on the US dollar index, and may even amplify or suppress the actual fluctuation of the US dollar index, that is, the actual fluctuation of the US dollar against other currencies.

In addition, the US dollar index has always been criticized for not including currencies that are familiar to the public today, such as the RMB, Australian dollar, Indian rupee, Singapore dollar and other Southeast Asian currencies. Investors basically cannot know the full range of the US dollar against major currencies from the index alone, and may be misled by the rise and fall of the index.

Even so, the US dollar index is still often quoted in the international foreign exchange market and financial news to indicate the current comprehensive situation of the US dollar exchange rate. Since the rise and fall of the US dollar is a general trend, although the US dollar index does not include some popular currencies, when the index changes, it can mostly reflect the situation of the US dollar against other currencies. In the futures market, investors, merchants or manufacturers can trade the US dollar index for hedging purposes, which is a form of diversification, avoiding some foreign exchange market risks regardless of whether they actually hold US dollars.