What is the US Dollar Index? How does the global financial thermometer influence your investment decisions?

Basic Understanding of the US Dollar Index

In financial markets, we often see investors discussing topics like “US dollar trend” and “US dollar index hitting new highs.” What exactly is the US Dollar Index? Simply put, it is an indicator tool that measures the strength of the US dollar relative to major international currencies.

US Dollar Index (abbreviated: USDX or DXY) is essentially a weighted index that tracks the exchange rate performance of the US dollar against six major international currencies. These six currencies are:

• Euro (EUR) - weight 57.6%
• Japanese Yen (JPY) - weight 13.6%
• British Pound (GBP) - weight 11.9%
• Canadian Dollar (CAD) - weight 9.1%
• Swedish Krona (SEK) - weight 4.2%
• Swiss Franc (CHF) - weight 3.6%

Since the US dollar is the world’s primary medium of exchange and reserve currency, fluctuations in the US Dollar Index often signal shifts in international capital flows and global economic trends.

Calculation Logic of the US Dollar Index

The US Dollar Index is calculated using a geometric weighted average method, not a simple average. This means that each currency’s influence on the index is not equal but determined by factors such as the country’s economic size, trade volume, and currency liquidity.

It is important to note that the US Dollar Index is not an exchange rate itself but a relative index. Using 1985 as the base period (index=100), the current value reflects the dollar’s appreciation or depreciation compared to the base period:

• Index 100 = base level
• Index 76 = 24% decline from the base period (USD depreciation)
• Index 176 = 76% increase from the base period (USD appreciation)

Therefore, a higher US Dollar Index indicates a stronger US dollar in the international market; a lower index indicates a weaker dollar.

Market Effects of US Dollar Appreciation and Depreciation

When the US Dollar Index rises

An increase in the US Dollar Index signifies dollar appreciation. What phenomena occur then?

International commodities priced in USD (such as crude oil, gold, bulk agricultural products) become relatively cheaper because purchasing these commodities requires more of other currencies to exchange for USD. Global capital flows into US assets (US Treasuries, US stocks) due to optimism about the dollar, while emerging markets face capital outflow pressures.

For export-oriented economies (like Taiwan), international competitiveness of their goods declines, increasing export pressure. If emerging markets hold USD-denominated debt, debt repayment burdens also increase.

When the US Dollar Index falls

A relative depreciation of the dollar drives capital to seek other investment opportunities. Asian emerging markets and growth assets become more attractive, potentially leading to hot money inflows into regional stock markets. The New Taiwan Dollar (NTD) may appreciate, lowering import costs but challenging export competitiveness.

For USD asset holders, there is a risk of “exchange loss”—the value of USD assets diminishes when converted back to local currency.

Interaction Between the US Dollar Index and Global Assets

US Dollar Index and Gold

Gold and the US dollar form a typical “see-saw” relationship:

• USD appreciation → Gold priced in USD becomes more expensive → Gold prices fall
• USD depreciation → Gold priced in USD becomes cheaper → Gold prices rise

However, this relationship is not absolute; factors like war, inflation expectations, and geopolitical risks also influence gold trends.

US Dollar Index and Stock Markets

The correlation between the US dollar and stock markets varies depending on the economic context:

• Interest rate hike cycle: USD appreciation attracts capital to the US → US stocks may rise simultaneously
• Recession expectations: A strong dollar hampers US export companies → US stocks face downward pressure

The case in March 2020 illustrates this complexity—during the global stock market crash, the USD rose to 103 due to safe-haven demand, but as the pandemic worsened and the Federal Reserve launched easing policies, the USD index quickly fell to 93.78.

US Dollar Index and Taiwan Stock Market / New Taiwan Dollar

The general pattern is:

• USD appreciation → Capital flows back to the US → NTD depreciation and selling pressure on Taiwan stocks
• USD depreciation → Capital flows back to Asia → NTD appreciation potential and increased attractiveness of Taiwan stocks

However, in extreme optimistic or pessimistic market sentiments, this pattern can break—risk assets worldwide may rise or fall together.

Core Factors Driving US Dollar Index Fluctuations

US Federal Reserve (Fed) Interest Rate Decisions

This is the most direct driver. Rate hikes → increased USD attractiveness → index rises; rate cuts → capital outflows → index falls. Every Fed meeting is a key market event.

US Economic Data

Indicators like Non-Farm Payrolls, unemployment rate, CPI inflation, GDP growth directly reflect US economic strength. Strong data → USD strengthens; weak data → USD weakens.

Geopolitical and International Events

Wars, political turmoil, regional conflicts trigger risk aversion. As the world’s best safe-haven asset, the USD often gains support during such times, creating a “strong dollar amid chaos” phenomenon.

Movements of Other Major Currencies

The US Dollar Index is a relative measure. When currencies like the euro or yen weaken due to their own economic weakness or loose policies, the index can rise even if the USD itself is not strengthening. This means that the weakening of other countries’ currencies can also push up the USD Index.

US Dollar Index vs Trade-Weighted US Dollar Index

There are two main measures of US dollar strength often confused:

US Dollar Index (DXY)

• Compiled by ICE (Intercontinental Exchange), the most widely circulated
• Covers six currencies, with the euro having the largest weight (57.6%)
• The “US dollar index” reported by media usually refers to this
• Reflects European and American market perspectives, leaning towards traditional finance views

Trade-Weighted US Dollar Index

• Compiled by the Federal Reserve, more often used for internal decision-making
• Includes over 20 currencies, covering US trading partners
• Incorporates currencies like the Chinese yuan, Korean won, New Taiwan dollar, Mexican peso, Thai baht, and other Asian and emerging market currencies
• More accurately reflects the actual strength of the USD in global trade

Generally, investors can use the DXY to quickly gauge market sentiment; those involved in forex trading or macroeconomic research may refer to the trade-weighted index for a more comprehensive view.

Practical Significance of the US Dollar Index for Investment

Understanding the meaning and trend changes of the US Dollar Index is essential for modern investors. It acts like a “thermometer” of the global financial market, reflecting shifts in international capital flows, economic expectations, and risk sentiment.

Whether investing in gold, oil, stocks, or forex, changes in the USD Index will trigger chain reactions. By observing the real-time performance of the US Dollar Index, investors can anticipate asset allocation opportunities, avoid potential risks, and seize market opportunities. Regularly monitoring the USD Index trend has become a key foundation for savvy investment decisions.