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What is the U.S. Dollar Index?

The U.S. Dollar Index is a measure of the value of the U.S. dollar against six other foreign currencies. Just as a stock index measures the value of a basket of securities relative to one another, the U.S. Dollar Index expresses the value of the dollar in relation to a “basket” of currencies. As the dollar gains strength, the index goes up and vice versa.

The strength of the dollar can be considered a temperature read of U.S. economic performance, especially regarding exports. The greater the number of exports, the higher the demand for U.S. dollars to purchase American goods.

The index is a geometric weighted average of six foreign currencies. Since the economy of each country (or group of countries) is of different size, each weighting is different. The countries included and their weights are as follows:

Euro (EUR): 57.6 percent
Japanese Yen (JPY): 13.6 percent
British Pound (GBP): 11.9 percent
Canadian Dollar (CAD): 9.1 percent
Swedish Krona (SEK): 4.2 percent
Swiss Franc (CHF): 3.6 percent
The index is calculated using the following formula:

USDX = 50.14348112 × EURUSD^-0.576 × USDJPY^0.136 × GBPUSD^-0.119 × USDCAD^0.091 × USDSEK^0.042 × USDCHF^0.036

When the U.S. dollar is used as the base currency, as in the example above, the value is positive. When the U.S. dollar is the quoted currency, the value will be negative.

We constantly monitor the performance of DXY because very often it gives us great trading opportunities.

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