What Is the U.S. Dollar Index (USDX)?
Let me explain what the U.S. Dollar Index, or USDX, really is. It's a straightforward measure of the U.S. dollar's value compared to a basket of foreign currencies. The Federal Reserve set it up in 1973 right after the Bretton Woods Agreement fell apart, and today it's handled by ICE Data Indices, part of the Intercontinental Exchange.
The six currencies in this index represent some of America's key trading partners. We've only updated it once, back in 1999, when the euro took over from currencies like the German mark, French franc, Italian lira, Dutch guilder, and Belgian franc. That means it doesn't perfectly match today's U.S. trade patterns.
Key Takeaways
You should know that the USDX gauges the dollar against six foreign currencies: the euro, Swiss franc, Japanese yen, Canadian dollar, British pound, and Swedish krona. It started just after the 1973 end of Bretton Woods, with a base value of 100, and its readings show how the dollar stacks up in global markets.
Understanding the USDX
The purpose here is clear: the USDX gives you insight into the dollar's relative strength, which can impact prices for goods, services, imports, and exports. It also helps explain the economy's condition.
As for composition, we calculate the index using exchange rates from the euro (EUR), Japanese yen (JPY), Canadian dollar (CAD), British pound (GBP), Swedish krona (SEK), and Swiss franc (CHF). The euro weighs in at 57.6%, followed by JPY at 13.6%, GBP at 11.9%, CAD at 9.1%, SEK at 4.2%, and CHF at 3.6%.
Over time, the index has seen big swings—peaking near 165 in 1984 and bottoming around 70 in 2007. Lately, it's stayed between 90 and 110, and as of October 2024, it's around 102. Macro factors like inflation, deflation, recessions, and growth in those countries affect it.
History of the USDX
The index kicked off in 1973 with a base of 100, right after Bretton Woods ended. Under that agreement, countries settled in dollars, convertible to gold at $35 per ounce. Overvaluation sparked concerns, leading Nixon to suspend the gold standard temporarily.
After that, countries could pick their exchange systems, and many floated their currencies, ending the agreement. The basket has changed only once, in 1999, with the euro replacing several European ones. Expect future changes to include currencies like the Chinese yuan or Mexican peso, as U.S. trade evolves.
Interpreting the USDX
If the index hits 120, that means the dollar has appreciated 20% against the basket over the period. A rise signals the dollar strengthening; a drop to 80 means a 20% depreciation. These changes depend on the timeframe you're looking at.
How to Trade the USDX
You can trade the USDX to track the dollar against these currencies in one go, or use derivatives like futures and options to hedge risks. These trade on the ICE Futures exchange. They're also available indirectly through ETFs and mutual funds.
For example, the Invesco DB U.S. Dollar Index Bullish Fund (UUP) tracks USDX futures for dollar gains, while the WisdomTree Bloomberg U.S. Dollar Bullish Fund (USDU) goes long against various currencies. There's also the bearish UDN fund that profits when the dollar weakens.
What Does the Dollar Index Tell You?
It tracks the dollar's value against six major currencies. Rising means strengthening; falling means weakening.
Currencies in the USDX Basket
- Euro - 57.6% weight
- Japanese yen - 13.6%
- Pound sterling - 11.9%
- Canadian dollar - 9.1%
- Swedish krona - 4.2%
- Swiss franc - 3.6%
How Do You Calculate the USDX Index Price?
The calculation is a weighted average of exchange rates, normalized by about 50.1435. The formula is USDX = 50.14348112 × EURUSD^-0.576 × USDJPY^0.136 × GBPUSD^-0.119 × USDCAD^0.091 × USDSEK^0.042 × USDCHF^0.036. Negative exponents mean USD is the quote currency; positive mean it's the base.
The Bottom Line
In summary, the USDX measures the dollar's strength against six key currencies like the euro and yen. Created in 1973, it's still relevant for gauging U.S. economic health, and you can use it for speculation or hedging via various financial products.
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