The secret behind the USD Index trend chart: a thermometer to grasp global capital flows

When you open financial news, do you often see headlines like “Dollar Strengthens” or “Dollar Index Hits New High”? But what do these numbers actually represent, and how do they affect your investment portfolio? Today, from a trader’s perspective, we will take you deep into the logic behind the USD Index chart.

The Essence of the USD Index (USDX): A Relative Strength Measurement Tool

First, let’s clarify a concept: The USD Index is not an exchange rate, nor a price, but a relative index.

Imagine comparing an athlete’s performance—not by how fast they run (absolute value), but by how they perform relative to others (relative value). The USD Index works the same way—it measures the dollar’s relative strength against a basket of major international currencies.

In simple terms, the USD Index tracks the exchange rate fluctuations of the US dollar against six major currencies:

• Euro (EUR): 57.6%
• 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%

These six currencies represent economies of over 24 developed countries, giving the USD Index high market authority.

How to Read the USD Index Chart? The Core Calculation Logic Revealed

The USD Index uses a geometric weighted average method for calculation, with the formula:

USDX = 50.14348112 × (USD/EUR)^-0.576 × (USD/JPY)^-0.136 × (USD/GBP)^-0.119 × (USD/CAD)^-0.091 × (USD/SEK)^-0.042 × (USD/CHF)^-0.036

What is the logic behind this formula?

• 50.14348112 is a constant set so that the base period (1985) index value is 100
• Each term inside the parentheses represents the exchange rate of USD against another currency
• The numbers after each currency (called “weights”) determine its influence on the overall index

The actual significance of the USD Index value:

• 100 = no change compared to the base period
• 76 = down 24% from the base period, indicating dollar depreciation
• 130 = up 30% from the base period, indicating dollar appreciation

In short: A higher USD Index indicates a stronger dollar in the international market; a lower index indicates a weaker dollar.

Two Market Directions of the USD: Appreciation and Depreciation

Chain reaction when the USD Index rises

When the USD Index rises, what does it signify? It indicates that the dollar is appreciating relative to other major currencies, meaning the dollar has become more valuable.

This leads to the following effects:

Direct benefits for the US:

• Lower costs for imported goods, boosting US consumers’ purchasing power
• Increased attractiveness of dollar-denominated assets, attracting global capital into US markets
• US debt, stocks, and other dollar-priced assets become more competitive

Potential pressure on export-oriented economies (like Taiwan):

• Goods priced in USD, when the dollar appreciates, foreign buyers need more local currency to buy
• Export competitiveness declines, orders and income may be impacted
• Emerging markets with dollar-denominated debt face increased repayment pressure

Chain reaction when the USD Index falls

Conversely, when the USD Index declines, it indicates the dollar is depreciating relative to other currencies, and market demand for USD decreases.

Market reactions include:

• Global investors seek alternative investments, capital may flow into Asian stocks and emerging markets
• Taiwan stocks may attract more funds, pushing the index higher
• New Taiwan Dollar (NTD) may appreciate, but export products lose price competitiveness internationally
• Investors holding USD assets face exchange loss risk (a weaker dollar means less NTD when converting back)

Composition Weights of the USD Index and Market Impact

Why does the euro account for 57.6%? It relates to the reality of the global economy:

Eurozone’s dominant weight: The EU includes 19 member countries using the euro, with a huge economic scale. Therefore, any fluctuation in the euro significantly impacts the USD Index. In other words, if you see the USD Index fluctuate sharply, you should first check the latest moves of the European Central Bank (ECB) or eurozone economic data.

The Yen’s safe-haven role: Japan, as the third-largest economy, is known for low interest rates and high liquidity, often used as a safe-haven currency. During market instability, demand for the yen rises.

The other four currencies’ supplementary roles: GBP, CAD, SEK, and CHF together account for less than 30%, but CHF’s reputation for safety and stability means it can also support market confidence during crises.

Interaction Mechanism Between the USD Index and Global Assets

When the USD Index fluctuates, it influences not just exchange rates but the entire global financial market capital flows.

USD Index and Gold: The seesaw effect

This is the most clear negative correlation in the market:

• USD appreciation (index rising) → Gold priced in USD becomes more expensive → Demand drops → Gold prices fall
• USD depreciation (index falling) → Gold becomes cheaper → Attracts buyers → Gold prices rise

However, note that gold prices are also affected by inflation expectations, geopolitical risks, real interest rates, etc., so don’t rely solely on the USD Index chart.

USD Index and US stocks: A complex positive-negative game

The relationship between USD and US stocks is not fixed as purely positive or negative, but depends on the market environment:

During rate hike cycles: USD appreciates → Capital flows into the US → US stocks may rise simultaneously

During recession periods: USD appreciates (as a safe-haven buy) → US stocks decline (risk assets are sold off)

For example, in March 2020, during the global stock market crash, the USD Index surged to 103 due to panic-driven capital flight into the dollar. But later, with aggressive rate cuts and QE by the Fed, the dollar weakened again to 93.78.

Conclusion: When observing US stock performance, don’t just look at the USD Index alone; understand the current economic cycle and policy environment.

USD Index and Taiwan stocks, NTD dynamics

For Taiwanese investors, this is the most relevant interaction:

• USD appreciation (index rising) → Capital flows back to the US → NTD depreciates → Taiwan stocks face downward pressure
• USD depreciation (index falling) → Attention shifts to Asian emerging markets → NTD may appreciate → Supportive for Taiwan stocks

But there are exceptions. When the market is optimistic about the global economic outlook, USD, US stocks, and Taiwan stocks may rise together; conversely, during black swan events, all risk assets including stocks, currencies, and bonds may collapse simultaneously.

Factors Driving USD Index Fluctuations: Key Variables to Master

Since the USD Index chart is so important, what factors influence its changes?

Federal Reserve interest rate policy (the most direct driver)

This is almost the strongest signal affecting the USD Index:

• Rate hikes → US dollar asset yields rise → Global capital rushes in → USD appreciates → Index rises
• Rate cuts → US dollar attractiveness declines → Capital outflows → USD depreciates → Index falls

Every Fed meeting, markets focus on the USD Index reaction, as rate decisions directly alter capital flows.

US economic data signals

Indicators like Non-farm payrolls, unemployment rate, CPI inflation, GDP growth:

• Strong data → Optimism about US economic outlook → Increased USD demand → Index rises
• Weak data → Economic growth doubts → USD attractiveness declines → Index falls

Geopolitical risks and risk aversion

Wars, political turmoil, regional conflicts trigger global risk-off behavior. At such times, USD, as the safest and most liquid asset in the world, becomes the first choice for investors, pushing the USD Index higher. This explains why sometimes “the more chaotic, the stronger the dollar.”

Weakening of other major currencies

The USD Index is relative; it doesn’t necessarily mean the dollar itself is strengthening, but could also be due to other currencies like the euro or yen weakening due to their own national circumstances. For example:

• EU economic stagnation → euro weakens → USD Index rises passively
• Japanese Bank’s continued easing → yen under pressure → USD Index rises passively

The Trade-Weighted US Dollar Index: A Closer Reflection of Reality

Many investors only watch the USD Index, but the Federal Reserve itself more often refers to the “Trade-Weighted US Dollar Index”.

Limitations of the USD Index:

• Only includes 6 currencies
• Heavy weighting on the euro (57.6%), with a “Euro-American bias”
• Does not fully reflect the actual US trade environment

Advantages of the Trade-Weighted Index:

• Includes over 20 currencies, such as RMB, MXN, KRW, TWD, THB
• Weighted based on actual US trade relationships
• More accurately reflects the exchange rate environment faced by US companies

Practical advice: If you are an ordinary investor, monitoring the USD Index chart is sufficient; but if you are involved in forex trading or macro analysis, consider also referencing the Trade-Weighted Index for a more comprehensive view.

Summary: The USD Index as a Global Capital Flow Indicator

The USD Index chart is fundamentally a signal light for capital flows. Its rise and fall are driven by multiple factors including Fed policies, US economic data, global risk appetite, and geopolitical events.

Key insights for investors:

• When the dollar appreciates, watch for potential pressure on US stocks, gold, and emerging markets
• When the dollar depreciates, emerging markets and Asian stocks may present opportunities
• Investors holding overseas assets must closely monitor exchange rate risks
• Forex traders should deeply understand the economic logic behind the USD Index chart

Whether you are a long-term investor or a short-term trader, mastering the fluctuations of the USD Index can help you more accurately judge market directions, optimize asset allocation, and reduce investment risks. In today’s globalized financial markets, the USD Index has become an essential fundamental skill.