A barometer of global capital flows: How does the US Dollar Index influence your investment decisions?

What exactly is the US Dollar Index measuring?

If you follow financial markets, you’ve probably heard news about the “US Dollar Index strengthening” or “US Dollar Index falling.” But what exactly does this index measure? Simply put, the US Dollar Index (called USDX or DXY in English) is not tracking a company’s stock nor just an exchange rate; it is a “relative indicator” used to gauge the overall strength or weakness of the US dollar against other major international currencies.

Think of it as a thermometer for the global financial market. The US dollar is the most commonly used medium of exchange worldwide—whether in commodity trade, energy, gold transactions, or international investments—most are priced in USD. Therefore, when the US Dollar Index fluctuates, it triggers chain reactions in the flow of international capital.

What six currencies make up the US Dollar Index?

Calculating the US Dollar Index is straightforward: it tracks the exchange rate changes of the dollar against six major currencies. These six currencies are:

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

It’s worth noting that although only six currencies are included, the economies behind them far exceed six countries. The Eurozone alone comprises 19 countries, plus the issuing countries of the other five currencies, meaning the US Dollar Index actually reflects the economic conditions of over 24 developed nations. This broad representation gives the US Dollar Index high authority in the global financial market.

The euro holds the largest weight mainly because the Eurozone has a large economic size and many member states, making it the second-largest international currency after the USD. This also means that when the euro experiences significant volatility, the US Dollar Index’s movements tend to be quite noticeable.

How is the US Dollar Index calculated? The underlying math logic

The US Dollar Index uses a “geometric weighted average” method for calculation, which considers differences in economic size, trading volume, and currency influence among the countries. Each currency is assigned a different calculation proportion based on its weight.

Key point: The US Dollar Index is not an exchange rate or a price; it is a relative index. Its base period is set at 100 in 1985, serving as a reference standard from that point onward. So, when you see the index at 120, it means the dollar has appreciated by 20% compared to 1985; if it’s 80, it indicates a 20% depreciation.

In simple terms: the higher the US Dollar Index, the stronger the dollar is in the international market; the lower it is, the weaker the dollar becomes.

What does a rising vs. falling US Dollar Index represent?

When the US Dollar Index rises

A rising US Dollar Index indicates the dollar is appreciating, and other major currencies (like the euro, yen, etc.) are depreciating relative to it. Since many international commodities are priced in USD, a stronger dollar tends to lower their USD prices, but makes them more expensive when purchased with other currencies.

Impact on the US:

• Imported goods become cheaper, allowing US consumers to buy foreign products at lower costs
• Global capital flows into US assets (like US Treasuries) become more attractive
• Helps control inflation and supports economic stability

Challenges for export-oriented countries (like Taiwan):

• Their goods become relatively more expensive on the international market, reducing export competitiveness
• Revenue from foreign sales priced in USD shrinks
• Emerging markets with large USD-denominated debt face increased repayment pressure

When the US Dollar Index falls

A declining US Dollar Index means the dollar is weakening, and market confidence is waning. Investors tend to withdraw from USD assets and seek other investment opportunities, such as Asian stocks or emerging markets.

Possible effects on Taiwan:

• Hot money flows into Taiwanese stocks, boosting the Asian capital flow and potentially raising the stock market
• The New Taiwan dollar (NTD) may appreciate, lowering import costs but also reducing export competitiveness
• Investors holding US stocks or USD assets should watch for exchange losses—dollar depreciation means less TWD when converting back

How does the US Dollar Index influence global asset prices?

Changes in the US Dollar Index are not just numbers—they directly impact your investment portfolio:

The “Yin-Yang” relationship between gold and the US Dollar Index

Gold and the dollar usually have an inverse relationship. When the US Dollar Index rises (USD appreciates), gold prices tend to fall; conversely, when the index declines, gold becomes more attractive and prices rise. This is because gold is priced in USD, so a stronger dollar increases the cost of gold in other currencies, reducing demand. Of course, gold prices are also affected by inflation, geopolitical tensions, oil prices, and other factors, so the relationship isn’t purely deterministic.

The complex interaction between US stocks and the US Dollar Index

The relationship between US stocks and the US Dollar Index isn’t strictly positive or negative. Sometimes, a stronger dollar attracts capital inflows into US equities, pushing prices higher; other times, excessive dollar strength hampers US export companies’ competitiveness, dragging down the stock market. Therefore, understanding their relationship requires considering the broader economic context and Federal Reserve policies.

The capital flow effects on Taiwan stocks and the New Taiwan dollar

Generally, an increase in the US Dollar Index prompts capital to flow back to the US, leading to a depreciation of the NTD and pressure on Taiwan stocks; conversely, a decline in the index may attract hot money into Asia, benefiting the NTD and Taiwan’s stock market. But this isn’t an absolute rule—during optimistic global economic outlooks, US stocks, Taiwan stocks, and the dollar may rise together; during black swan events, all assets might decline simultaneously.

What factors drive the US Dollar Index up or down?

Federal Reserve interest rate policies

This is almost the most direct influence. Raising interest rates increases yields on dollar assets, attracting global capital inflows, and pushing the US Dollar Index higher; lowering rates has the opposite effect. Market closely watches Fed rate decisions, as they often have the most immediate impact on the index’s fluctuations.

US economic data

Employment figures (non-farm payrolls, unemployment rate), CPI inflation, GDP growth—these are key indicators. Strong economic data boost market confidence in the dollar, raising the US Dollar Index; weak data undermine confidence, causing the index to fall.

Geopolitical and international events

Wars, political turmoil, regional conflicts can trigger risk aversion. In such environments, the dollar, as the world’s preferred safe-haven asset, tends to strengthen—despite the apparent contradiction that “the more chaotic, the stronger the dollar,” this reflects the dollar’s status as a safe haven.

The trend of other major currencies

The US Dollar Index is a relative measure of “USD vs. six foreign currencies.” Even if the dollar itself doesn’t move, if currencies like the euro or yen weaken due to economic slowdown or loose policies, the index will rise accordingly. In other words, depreciation of other countries’ currencies can make the dollar look stronger.

US Dollar Index vs. US Trade-Weighted Index: Which is more important?

Many investors think of the “US Dollar Index” when considering dollar strength. But in fact, the Federal Reserve itself more often refers to the “US Trade-Weighted Index” in decision-making. What’s the difference?

US Dollar Index (DXY):

• Most well-known, most cited by media
• Tracks only six currencies: euro, yen, pound, CAD, SEK, CHF
• Compiled by ICE (Intercontinental Exchange)
• The euro accounts for 57.6%, reflecting a Euro-American perspective

US Trade-Weighted Index:

• The Fed’s more official and preferred indicator
• Weighted based on actual US trade partner currencies
• Covers over 20 currencies, including RMB, Korean won, TWD, Mexican peso, Thai baht, and other emerging market currencies
• Provides a more accurate reflection of US trade realities and aligns better with global market conditions

In short, the US Dollar Index is suitable for quick market sentiment checks, while the Trade-Weighted Index offers a deeper insight into the dollar’s real purchasing power and Fed’s policy considerations. For casual investors, the DXY is sufficient; for forex traders or macroeconomic researchers, the Trade-Weighted Index provides more precise decision support.

Why must investors pay attention to the US Dollar Index?

The US Dollar Index is a barometer of global capital flows. Prices of gold, crude oil, stocks, and other assets are all influenced by its movements. Mastering the trend of the US Dollar Index helps you understand the pulse of international finance and make smarter decisions in forex trading, cross-border investments, and asset allocation. Especially in volatile markets, sensitivity to the US Dollar Index can determine whether you can seize investment opportunities or avoid risks in time.