The U.S. Dollar Index is a measure of the value of the U.S. dollar against six other foreign currencies. Just as a stock index measures the value of a basket of securities relative to one another, the U.S. Dollar Index expresses the value of the dollar in relation to a “basket” of currencies. As the dollar gains strength, the index goes up and vice versa.
The strength of the dollar can be considered a temperature read of U.S. economic performance, especially regarding exports. The greater the number of exports, the higher the demand for U.S. dollars to purchase American goods.
How the Dollar Index works and what currencies are in it
The index is a geometric weighted average of six foreign currencies. Since the economy of each country (or group of countries) is of different size, each weighting is different. The countries included and their weights are as follows:
- Euro (EUR): 57.6 percent
- Japanese Yen (JPY): 13.6 percent
- British Pound (GBP): 11.9 percent
- Canadian Dollar (CAD): 9.1 percent
- Swedish Krona (SEK): 4.2 percent
- Swiss Franc (CHF): 3.6 percent
The index is calculated using the following formula:
USDX = 50.14348112 × EURUSD^-0.576 × USDJPY^0.136 × GBPUSD^-0.119 × USDCAD^0.091 × USDSEK^0.042 × USDCHF^0.036
When the U.S. dollar is used as the base currency, as in the example above, the value is positive. When the U.S. dollar is the quoted currency, the value will be negative.
This gives you the USDX, which can be traded on the Intercontinental Exchange, or ICE. ICE is a global exchange that handles clearing, financial data, and operates multiple markets across nine different asset classes. It also owns the trademarks for U.S. Dollar Index, Dollar Index, and USDX. The U.S. Dollar Index is property of the Intercontinental Exchange.
Many factors will affect how the USDX moves. Inflation or deflation of any currency, monetary policy, geopolitical conflicts, and export/import ratios, just to name a few. The U.S. dollar is the world’s reserve currency, and as such usually maintains high…
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