Global Financial Thermometer: A Complete Analysis of the US Dollar Index Composition and Market Impact

Why Is the US Dollar Index Being Watched Worldwide?

Have you noticed that whenever financial news mentions “the dollar appreciating” or “the dollar weakening,” the entire global financial market starts to change? The key behind this is a mysterious indicator called the US Dollar Index (USDX or DXY).

If we compare the global financial market to a vast ecosystem, then the US Dollar Index is like the system’s “thermometer”—it not only reflects the strength or weakness of the dollar but also triggers chain reactions, affecting everything from gold to stocks, from emerging markets to traditional assets, almost everywhere.

Composition of the US Dollar Index: The Balance of Six Major Currencies

To understand how important the US Dollar Index is, first, you need to know how it is constructed.

The USDX is not a number that appears out of nowhere; it is a weighted index composed of six major international currencies:

Looking at this table, you might ask: “Why only six?” Because these six currencies represent not just six countries but over 24 developed economies. The euro alone covers 19 EU member states, the yen represents the third-largest economy globally, and the British pound, Canadian dollar, Swedish krona, and Swiss franc are all backed by mature financial markets.

So, when people say “the dollar index has risen,” they are actually referring to the overall strengthening of the dollar relative to these currencies.

Why does the euro have the highest weight?

In the composition of the USDX, the euro dominates with a 57.6% weight, and this is not a random decision. Europe’s economy is huge; the euro is the second-largest reserve and trading currency globally, ranking just after the dollar in international trade. This also means that if you want to predict the trend of the dollar index, you must first pay attention to the movements of the euro.

The yen ranks second with 13.6% weight because Japan is the third-largest economy, and the yen has high liquidity, often used by international capital as a safe haven. The combined weight of the pound, Canadian dollar, Swedish krona, and Swiss franc is less than 20%, but each of these countries—UK, Canada, etc.—are important global financial centers.

What Does the Rise or Fall of the US Dollar Index Mean? How It Directly Affects Your Investments

Chain Reaction When the US Dollar Index Rises

When the USDX rises, it indicates that the dollar has become more valuable relative to other currencies. This may sound abstract, but the actual impacts are very concrete:

For the US itself: The cost of imported goods decreases because settling in dollars becomes cheaper. At the same time, global safe-haven funds flow into US assets (especially US Treasuries and US stocks) because dollar-denominated assets become more attractive. This usually results in capital inflows, supporting US economic growth, and helping to curb inflation.

For export-oriented economies (like Taiwan): The situation is reversed. When the dollar appreciates, goods priced in dollars become more expensive, reducing buyers’ willingness to purchase. Taiwanese exporters face pricing pressures, and their competitiveness declines. Emerging markets with large dollar-denominated debt also face increased debt repayment pressures.

For gold and commodities: International commodities like gold and oil are priced in dollars. When the dollar appreciates, the cost to buy these commodities in other currencies increases, demand shrinks, and commodity prices tend to fall.

What happens when the dollar index falls?

When the USDX declines, market confidence begins to shift. Investors withdraw funds from dollar assets and seek other opportunities, especially emerging markets and Asian stock markets start to attract attention.

Implications for Taiwanese investors: A weakening dollar attracts global hot money into Taiwan stocks, pushing up stock prices. The New Taiwan Dollar (NTD) may appreciate, making imported goods cheaper but exports more expensive. If you hold US stocks or dollar deposits, a depreciating exchange rate can directly eat into your returns—that’s what we call “currency loss.”

In-Depth Analysis: How the US Dollar Index Moves Global Assets

US Dollar Index and Gold: The See-Saw Effect

Gold and the dollar have a well-known inverse relationship in the financial markets:

• Dollar appreciation → Gold priced in dollars becomes more expensive → Buyers reduce purchases → Gold prices fall
• Dollar depreciation → Gold becomes relatively cheaper → Safe-haven buyers increase → Gold prices rise

However, note that this relationship, while generally true, is not absolute. Geopolitical crises, wars, extreme inflation, and other factors can also drive gold prices. Sometimes, gold and the dollar can rise together.

US Dollar Index and US Stocks: Complex Interactions

Many assume that the dollar and US stocks are positively correlated (both strong or both weak), but reality is more complex:

Scenario 1: Dollar appreciation drives US stocks higher When the dollar rises because of strong US economic data and optimistic Fed policies, capital flows into both, leading to simultaneous gains.

Scenario 2: Excessive dollar strength hurts US stocks But if the dollar becomes too strong, it can weaken US export competitiveness, dragging down the entire stock market. During the March 2020 pandemic crisis, this was evident: the dollar index soared to 103 due to safe-haven demand, while US stocks plunged. Later, as the US pandemic worsened and the Fed flooded the market with liquidity, the dollar quickly depreciated to 93.78, and stocks rebounded.

Therefore, judging the relationship between the dollar and US stocks requires considering the economic context and policy environment, not just a single number.

US Dollar Index and Taiwan Stocks / NTD: The Complex Interaction

The general pattern is:

• Dollar appreciation → Capital flows back to the US → TWD depreciates → Taiwan stocks face pressure
• Dollar depreciation → Capital flows into Asia → TWD appreciates → Taiwan stocks benefit

But there are exceptions. When the global economic outlook is optimistic, US stocks, Taiwan stocks, and the dollar can rise together; during black swan events, all asset classes might collapse simultaneously. In such cases, the dollar may strengthen solely due to safe-haven demand.

How Is the US Dollar Index Calculated? The Underlying Math Logic

The USDX is calculated using a geometric weighted average method, which sounds complicated but is quite straightforward:

The dollar index is not a simple average of the six exchange rates; it assigns different “weights” based on each currency’s economic importance, then performs a weighted calculation. The weights are the ones shown in the earlier table—57.6% for euro, 13.6% for yen, etc.

The result is a relative index, not an absolute price:

• Index = 100: baseline level, no change
• Index = 120: 20% increase from baseline, dollar has strengthened
• Index = 80: 20% decrease, dollar has weakened

Thus, the dollar index number itself has no particular intrinsic meaning; what matters is its change and trend.

Four Major Factors Driving the Fluctuations of the US Dollar Index

1️⃣ Federal Reserve Interest Rate Policies—The Most Direct Impact

The Fed’s interest rate decisions are almost the strongest drivers of the dollar index:

• Rate hikes: US interest rates rise, attracting global capital seeking yields → Dollar appreciates, index rises
• Rate cuts: Cost of capital decreases, investors may shift elsewhere → Dollar depreciates, index falls

Every time the Fed announces a rate decision, markets react strongly because it directly changes the flow of global capital.

( 2️⃣ US Economic Data—Determining Market Confidence

Macroeconomic data such as employment figures (non-farm payrolls, unemployment rate), CPI inflation, GDP growth influence market perceptions of the dollar:

• Strong data: US economy is robust → Dollar appreciates
• Weak data: Economic slowdown, declining confidence → Dollar depreciates

) 3️⃣ Geopolitical and International Events—Safe-Haven Sentiment

Wars, political turmoil, financial crises trigger global safe-haven sentiment. During such times, investors seek the safest assets, and the dollar, as the world’s reserve currency, often becomes the first choice. So sometimes, the dollar appreciates amid chaos, which may seem counterintuitive but is actually logical.

4️⃣ Movements of Other Major Currencies—Relative Game

Remember, the USDX is a relative index. Even if the dollar itself remains unchanged, if the euro or yen depreciate due to their own economic issues, the USDX will rise. In other words, weakening of other currencies can make the dollar index look stronger.

US Dollar Index vs Trade-Weighted U.S. Dollar Index: Which Is More Important?

If you only follow financial news, you’ll see reports about the “US Dollar Index” (DXY). But if you delve into Fed policies or forex markets, you’ll find that the Trade-Weighted U.S. Dollar Index ###Trade-Weighted U.S. Dollar Index### is actually more valued by the Fed.

( Features of the US Dollar Index

• Most common and widely known
• Created by ICE (Intercontinental Exchange)
• Includes only six currencies
• Euro accounts for over 50%, reflecting a Euro-American perspective

) Features of the Trade-Weighted U.S. Dollar Index

• Main indicator referenced by the Fed
• Calculated based on actual US trade flows with countries
• Covers more than 20 currencies, including RMB, Korean won, TWD, Thai baht, and other emerging Asian currencies
• More aligned with current global market conditions and better reflects the true trade strength of the dollar

Simple judgment: For general investors, the USDX is sufficient. But if you are involved in forex trading, macro research, or want a deeper understanding of Fed logic, the trade-weighted index provides more precise insights.

Conclusion: Master the US Dollar Index, Grasp Global Capital Flows

The USDX is like a “weather vane” for the global financial market. Its rises and falls not only influence exchange rates but also impact gold, oil, stocks, and other assets. Whether you invest in US stocks, gold, or Taiwan stocks, or trade forex or simply want to understand the trend of the NTD, understanding the composition and operation of the dollar index is an essential skill.

Next time you see news saying “the dollar appreciates” or “the dollar index hits a new high,” you’ll be able to quickly interpret what this means for your investment portfolio instead of passively waiting for market changes.