US Dollar Index (USDX)

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What is the US Dollar Index (USDX)?

The US Dollar Index is a measure of how the greenback – which is a term used for the US dollar – compares to a basket of foreign currencies. USDX currently includes six currencies: the euro (EUR), the Japanese yen (JPY), the British pound (GBP), the Canadian dollar (CAD), the Swedish krona (SEK), and the Swiss franc (CHF).

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Techopedia Explains the US Dollar Index (USDX) Meaning

Techopedia Explains the US Dollar Index (USDX) Meaning
Techopedia Explains the US Dollar Index (USDX) Meaning

The clearest US Dollar Index definition is that it’s a measure of how the US dollar compares to a basket of foreign currencies. It is used by investors and economists to gauge whether the US dollar is appreciating or depreciating against these currencies – and by what percentage.

This is particularly important as the US dollar is the world’s most widely used currency for international business, according to the Council on Foreign Relations, a US think tank.

“Since the end of World War II, the dollar has been the world’s most important means of exchange,” it stated. “It is the most commonly held reserve currency and the most widely used currency for international trade and other transactions around the world.”

History of the US Dollar Index (DXY)

History of the US Dollar Index (DXY)
Source: Statista

The US Dollar Index was launched by the US Federal Reserve in 1973 to measure the greenback’s value in comparison to other international currencies. It effectively replaced the Bretton Woods Agreement between allied nations that used the gold standard to create a fixed currency exchange rate.

Since 1985, Intercontinental Exchange (ICE) has been responsible for maintaining and calculating this index, as well as distributing the data to vendors.

How the US Dollar Index Works

Now that we’ve established the US Dollar Index meaning, let’s look at how it works.

A calculation is made to establish how the US dollar compares to other leading currencies.

According to ICE, if the figure has risen, then this means the US dollar has appreciated compared to them. Conversely, if it’s fallen, then it’s depreciated against the wider basket.

Although the US Dollar Index is generally regarded as representing the principal trading partners of the US, this is now out of date. As the original line-up of currencies has only been changed once – when the euro arrived a quarter of a century ago – critics suggest it’s no longer so representative.

For example, the top five purchasers of US goods exports in 2022 were led by Canada, according to the Office of the United States Trade Representative. US goods exports to the European Union 27, meanwhile, were $350.8bn.

The full list was:

  • Canada $356.5bn
  • Mexico $324.3bn
  • China $150.4bn
  • Japan $80.2bn
  • UK $76.2bn

“The United States is the world’s 2nd-largest trading nation, behind only China, with over $7trn in exports and imports of goods and services in 2022,” it stated.

“The US has trade relations with more than 200 countries, territories, and regional associations around the globe.”

US Dollar Index Components

Before the euro was created in 1999, the original USDX contained ten currencies.

This number included all the current constituents – apart from the euro – as well as the West German mark, the French franc, the Italian lira, the Dutch guilder, and the Belgium franc.

Currently, the US Dollar Index is made up of currencies from six countries/regions of differing sizes. As a result, it’s not equally weighted.

Unsurprisingly, given its use in so many countries, the euro is by far the biggest component, accounting for a 57.6% share of the overall basket of currencies, according to ICE.

It’s followed by the Japanese yen with 13.6%, the British pound at 11.9%, 9.1% for the Canadian dollar, the Swedish krona on 4.2%, and the Swiss franc’s 3.6%.

US Dollar Index Components
Source: ICE

USDX vs. DX vs. BBDXY

When you’re researching the US Dollar Index, the chances are you’ll come across several abbreviations – but what do they all mean?

USDX is the principle term related to the US Dollar Index. It’s the one that you’re likely to  come across more often.

DX represents futures contracts on the US dollar.

BBDXY, meanwhile, is a spot index from Bloomberg that considers global currency market liquidity and US trading partners.

Calculation of the US Dollar Index

The US Dollar Index is calculated in real-time, approximately every 15 seconds, from a feed of the spot prices of all the component currencies, according to ICE.

This is the formula used:

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

“The price used for the calculation of the Index is the mid-point between the top of the book bid/offer in the component currencies,” it stated. “This real-time calculation is redistributed to all data vendors.”

The index started in 1973 with a base of 100. All movements since – both up and down – are compared to this original value. According to Trading Economics, the index hit its all-time high of 164.72 in February 1985.

What Drives the Price of the USD Index?

Several factors can have a bearing on the value of the US dollar – and all should be considered by investors.

The Bottom Line

The US dollar is hugely important to the world economy. As well as having been the world’s reserve currency for decades, it’s vital to both global banking and international trade.

There are various pros and cons. For example, a strong dollar makes imported goods cheaper for US consumers, according to Fidelity. However, it’s not good for multinational companies earning revenue overseas as this income will be worth less when exchanged into US dollars.

The US Dollar Index, therefore, provides everyone with a snapshot as to how strong – or weak – the so-called greenback is against six other important currencies. The index can be affected by a wide variety of factors, including stock market performance, interest rates, inflation, global conflicts, and political instability.

FAQs

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Rob Griffin
Financial Journalist
Rob Griffin
Financial Journalist

Rob is a seasoned journalist with over three decades of experience spanning across business and finance journalism. Before embarking on a freelance career in 2002, he contributed his expertise to the business desks of notable publications such as The Guardian, Yorkshire Post, Sunday Business (now Business Post), and Sunday Express. Throughout his freelance journey, Rob has been a regular contributor to a wide range of national newspapers, consumer magazines, trade publications, and websites. His work has appeared in titles such as The Independent, Citywire, Daily Express, FT Adviser, and Sunday Telegraph, covering an array of subjects from market trends to…