The U.S. Dollar Index measures the value of the United States dollar compared to a selection of foreign currencies, which represent countries the U.S. trades with. It’s like a gauge showing how the dollar performs against other currencies. You might see it labeled as USDX, DXY, DX, or sometimes informally called the “Dixie.” When the U.S. dollar strengthens compared to other currencies, the index value goes up.
The USDX was created by the U.S. Federal Reserve in 1973 following the end of the Bretton Woods Agreement. Nowadays, it’s managed by ICE Data Indices, which is part of the Intercontinental Exchange (ICE). The “U.S. Dollar Index” is a registered trademark.
The USDX includes six currencies that are considered America’s top trading partners. However, the index was last updated in 1999 when the euro replaced the German mark, French franc, Italian lira, Dutch guilder, and Belgian franc. As a result, the index doesn’t show the current U.S. trade accurately.
Understanding the U.S. Dollar Index (USDX)
The index we use now looks at six different currencies from around the world. These are the euro (EUR), Japanese yen (JPY), Canadian dollar (CAD), British pound (GBP), Swedish krona (SEK), and Swiss franc (CHF).
Most of the index is based on the euro, making up 57.6% of it. After that, the Japanese yen makes up 13.6%, the British pound 11.9%, the Canadian dollar 9.1%, the Swedish krona 4.2%, and the Swiss franc 3.6%.
This index began in 1973 with a starting value of 100. Since then, any changes in its value are compared to this starting point. It was created just after the Bretton Woods Agreement ended. Before, countries would balance their money using U.S. dollars, which were linked to gold. However, because the U.S. dollar was too expensive, President Richard Nixon stopped linking it to gold temporarily. After that, countries could decide how to link their money. Many chose to let their money’s value change based on the market, which ended the old agreement.
History of the U.S. Dollar Index (USDX)
Throughout its history, the U.S. Dollar Index has had big ups and downs. In 1984, it hit its highest point ever, almost reaching 165. But in 2007, it dropped to nearly 70, which was its lowest.
For the past few years, the index has mostly stayed between 90 and 110, not moving too much.
Many things affect the index, like how much money is out there (inflation/deflation) and how well the economies of the countries in the index are doing (recessions and growth).
Since the index started, it’s only changed once. In 1999, the euro replaced a bunch of European currencies that were in the index before, like Germany’s old money, the Deutschemark.
In the future, we might see other currencies replacing some in the index. This is because the index wants to show the major countries that the U.S. trades with. So, we might start seeing currencies like the Chinese yuan (CNY) and the Mexican peso (MXN) instead of others in the index. This is because China and Mexico are big trading partners with the U.S.
Interpreting the USDX
An index value of 120 suggests that the U.S. dollar has appreciated 20% versus the basket of currencies over the time period in question. Simply put, if the USDX goes up, that means the U.S. dollar is gaining strength or value when compared to the other currencies.
Similarly, if the index is currently 80, falling 20 from its initial value, that implies that it has depreciated 20%. The appreciation and depreciation results are a factor of the time period in question.
How to Trade the USDX
The U.S. dollar index helps traders keep an eye on how the USD is doing compared to a group of certain currencies in one go. It’s a useful tool for them to manage any risks related to the dollar. Traders can also use futures or options strategies linked to the USDX.
These financial products are currently traded on the New York Board of Trade. Investors can use the index to protect themselves from currency changes or to take calculated risks. You can also indirectly invest in the index through exchange-traded funds (ETFs) or mutual funds.
For example, there’s the Invesco DB U.S. Dollar Index Bullish Fund (UUP), an ETF that follows how the US dollar’s value changes using USDX futures contracts. Another option is the Wisdom Tree Bloomberg U.S. Dollar Bullish Fund (USDU), an actively managed ETF that bets on the U.S. dollar against a mix of developed and emerging market currencies.
In addition, Invesco DB provides the U.S. Dollar Index Bearish Fund (UDN), which essentially bets against the dollar. When the dollar weakens, this fund gains value.
The dollar index follows how the U.S. dollar is doing compared to a group of significant global currencies. When the index goes up, it shows that the dollar is getting stronger against the basket of currencies. Conversely, if the index goes down, it means the dollar is weakening against them.
The USDX shows how strong the US dollar (USD) is compared to other currencies. It has been keeping track since 1973, but the weights changed in 2002 when the euro replaced some European currencies. Here’s how the currencies are weighted:
Euro (EUR) – 57.6%
Japanese yen (JPY) – 13.6%
Pound sterling (GBP) – 11.9%
Canadian dollar (CAD) – 9.1%
Swedish krona (SEK) – 4.2%
Swiss franc (CHF) – 3.6%
The USDX uses a mix of six currencies with different weights (as mentioned earlier). To calculate the index, it averages the U.S. dollar exchange rates with these currencies, adjusted by a factor (around 50.1435).
The formula for USDX is:
USDX = 50.14348112 × EURUSD^-0.576 × USDJPY^0.136 × GBPUSD^-0.119 × USDCAD^0.091 × USDSEK^0.042 × USDCHF^0.036
The Bottom Line
The U.S. Dollar Index (USDX) compares the strength of the U.S. dollar (USD) to a group of six important currencies: the Euro, Pound, Yen, Canadian Dollar, Swedish Korner, and Swiss Franc. It started in 1973 and is still helpful today. People use the USDX to guess how the U.S. economy is doing. Traders also use it to guess if the dollar’s value will go up or down, or to protect themselves from currency risks in other countries.
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