What is the U.S. Dollar Index (USDX)?
The U.S. Dollar Index (USDX) measures the value of the U.S. dollar relative to a basket of foreign currencies. Created in 1973 by the U.S. Federal Reserve, the index is now managed by ICE Data Indices. The USDX includes six major world currencies: the Euro, Swiss Franc, Japanese Yen, Canadian Dollar, British Pound, and Swedish Krona. This combination reflects America’s significant trading partners but hasn’t been updated frequently, which means it might not accurately represent current trade dynamics.
Key Takeaways
- The USDX measures the dollar’s value against six major currencies.
- The primary components are the Euro, Swiss Franc, Japanese Yen, Canadian Dollar, British Pound, and Swedish Krona.
- Initially set at a base value of 100 in 1973, the index’s movements indicate the dollar’s strength or weakness.
- Movements in the index reflect the prevailing strength of the dollar in the global market.
Understanding the U.S. Dollar Index (USDX)
The index is calculated by factoring in the exchange rates of six key foreign currencies. The Euro, making up 57.6% of the total basket, significantly influences the index. The respective weights of the other currencies include the Japanese Yen (13.6%), British Pound (11.9%), Canadian Dollar (9.1%), Swedish Krona (4.2%), and Swiss Franc (3.6%). With a start point of 100 in 1973, today’s values are relative to that base, showing how the dollar’s value has fluctuated over time.
History of the USDX
Over its history, the U.S. Dollar Index has seen significant highs and lows – peaking near 165 in 1984 and bottoming out close to 70 in 2007. Despite occasional updates, like the Euro’s 1999 introduction, the USDX doesn’t always reflect the primary current trading partners, which could include the Chinese Yuan and the Mexican Peso in the future.
Interpreting the USDX
An index value of 120 suggests the U.S. dollar has appreciated by 20% relative to the basket of currencies during the period in question. Conversely, an index of 80 means it has depreciated by 20%. The USDX, therefore, eases assessments of the dollar’s strength or weakness in global markets.
How to Trade the USDX
Traders can leverage the U.S. Dollar Index to monitor the dollar’s performance against major currencies simultaneously. They may use futures or options either to hedge risks tied to the dollar or to speculate on its movements. Some investors resort to ETFs like the Invesco DB U.S. Dollar Index Bullish Fund (UUP) and the Wisdom Tree Bloomberg U.S. Dollar Bullish Fund (USDU). The Invesco DB U.S. Dollar Index Bearish Fund (UDN) is also notable for those betting against dollar strength.
What Does the Dollar Index Tell You?
The USDX offers a snapshot of the dollar’s value against a set of significant world currencies. If the index rises, it indicates a strengthening dollar. If it falls, the dollar is losing value relative to those currencies.
What Currencies Are in the USDX Basket?
The USDX basket includes:
- Euro (57.6%)
- Japanese Yen (13.6%)
- Pound Sterling (11.9%)
- Canadian Dollar (9.1%)
- Swedish Krona (4.2%)
- Swiss Franc (3.6%)
How Do You Calculate the USDX Index Price?
The USDX is calculated through a geometric weighted mean of the dollar’s exchange rates against the included currencies:
USDX = 50.14348112 × EURUSD^-0.576 × USDJPY^0.136 × GBPUSD^-0.119 × USDCAD^0.091 × USDSEK^0.042 × USDCHF^0.036
The Bottom Line
The U.S. Dollar Index (USDX) remains a significant measure of the dollar’s strength against a basket of six influential currencies. Although it was established in 1973, its relevance has persisted because traders and economists often use the index to gauge the health of the U.S. economy. The USDX plays a crucial role in currency trading, speculation, and hedging strategies.
Related Terms: USD, foreign exchange, futures, ETF, mutual funds
References
- Intercontinental Exchange. “U.S. Dollar Index Contracts - FAQ”.
- Intercontinental Exchange. “US Dollar Index”.
- CNBC. “DXY US Dollar Currency Index”.
- U.S. Census Bureau. “Top Trading Partners”.
- Intercontinental Exchange. “ICE FX Indices”.
