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U.S. Dollar Index (USDX)

What is the 'U.S. Dollar Index - USDX'

The U.S. dollar index (USDX) is a measure of the value of the U.S. dollar relative to the value of a basket of currencies of the majority of the U.S.'s most significant trading partners. This index is similar to other trade-weighted indexes, which also use the exchange rates from the same major currencies.

Explaining 'U.S. Dollar Index - USDX'

Currently, this index is calculated by factoring in the exchange rates of six major world currencies the euro, Japanese yen, Canadian dollar, British pound, Swedish krona and Swiss franc. The euro holds the most weight versus the dollar in the index, constituting about 58% of the weighting followed by the yen with about 14%. The index started in 1973 with a base of 100, and values since then are relative to this base.

Calculating U.S. Dollar Index Movements

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. Subtracting the initial value of 100 from the current value of 120 yields 20; dividing the difference by the initial value of 100 gives an appreciation of 20%. Similarly, if the index is currently 80, falling -20 from its initial value, then the same calculation would give a depreciation of 20%. The appreciation and depreciation results are a factor of the time period in question.

History of the U.S. Dollar Index

The U.S. dollar index has risen and fallen sharply throughout its history, reaching its high point in February 1985 with a value of 164.72 and its low point in March 2008 with a value of 70.698. As of June, 2016, the index carried a value of 93.67, meaning that the U.S. dollar has depreciated versus the basket of currencies since the index started in 1973. The index is greatly affected by macroeconomic factors, including inflation/deflation in the dollar and foreign currencies included in the comparable basket as well as recessions and economic growth in those countries.

Trading the U.S. Dollar Index

It is possible to incorporate futures or options strategies on the USDX. These financial products currently trade on the New York Board Of Trade. Investors can use the index to hedge general currency moves or to speculate.


Further Reading


Pricing US dollar index futures options: An empirical investigation
onlinelibrary.wiley.com [PDF]
… correlated with its component currencies exchange rates' changes (stated in American terms) and … The US Dollar Index settlement value is computed by Reuters Ltd … December): “The Relation Between Forward Prices and Futures Prices,” Journal of Financial Economics 9:321 …

Cross-correlations between the US monetary policy, US dollar index and crude oil marketCross-correlations between the US monetary policy, US dollar index and crude oil market
www.sciencedirect.com [PDF]
… correlated with its component currencies exchange rates' changes (stated in American terms) and … The US Dollar Index settlement value is computed by Reuters Ltd … December): “The Relation Between Forward Prices and Futures Prices,” Journal of Financial Economics 9:321 …

The economic value of co-movement between oil price and exchange rate using copula-based GARCH modelsThe economic value of co-movement between oil price and exchange rate using copula-based GARCH models
www.sciencedirect.com [PDF]
… correlated with its component currencies exchange rates' changes (stated in American terms) and … The US Dollar Index settlement value is computed by Reuters Ltd … December): “The Relation Between Forward Prices and Futures Prices,” Journal of Financial Economics 9:321 …

Cross-hedging foreign currency risk: empirical evidence from an error correction modelCross-hedging foreign currency risk: empirical evidence from an error correction model
link.springer.com [PDF]
… correlated with its component currencies exchange rates' changes (stated in American terms) and … The US Dollar Index settlement value is computed by Reuters Ltd … December): “The Relation Between Forward Prices and Futures Prices,” Journal of Financial Economics 9:321 …

Dollar index adjusted stock indicesDollar index adjusted stock indices
papers.ssrn.com [PDF]
… correlated with its component currencies exchange rates' changes (stated in American terms) and … The US Dollar Index settlement value is computed by Reuters Ltd … December): “The Relation Between Forward Prices and Futures Prices,” Journal of Financial Economics 9:321 …

Impact Analysis of US Dollar Index Volatility on Imports and Import Categories of Sri LankaImpact Analysis of US Dollar Index Volatility on Imports and Import Categories of Sri Lanka
ieeexplore.ieee.org [PDF]
… correlated with its component currencies exchange rates' changes (stated in American terms) and … The US Dollar Index settlement value is computed by Reuters Ltd … December): “The Relation Between Forward Prices and Futures Prices,” Journal of Financial Economics 9:321 …



Q&A About U.S. Dollar Index (USDX)


How is USDX affected by macroeconomic factors?

It tends to be highly correlated with inflationdeflation in foreign countries as well as with interest rates on long-term government bonds issued by those countries whose currencies are included in USDX's basket (and thus indirectly linked to their economic growth prospects); also it tends to be highly correlated with changes in foreign stock markets whose stocks tend to be traded more heavily overseas than domestically within those countries

What is the U.S. Dollar Index?

The U.S. dollar index is a measure of the value of the U.S. dollar relative to the value of a basket of currencies of most significant trading partners' currencies, including euro, Japanese yen, Canadian dollar, British pound, Swedish krona and Swiss francs.

How do you calculate USDX?

You take current exchange rates between each currency and US dollars and multiply those by their respective weights in order to get an overall weighted average exchange rate between US dollars and all other currencies included in USDX; then you divide this weighted average by 100 to get a percentage change from its base value (1) at any given point in time since 1973 when it was first calculated using this method; subtracting that base value from today's percentage gives you how much appreciation or depreciation has happened since 1973; thus dividing this difference by that initial base value gives you how much appreciation or depreciation has occurred per unit time period (e.g., per year).

Why does USDX use six major world currencies?

Because these are some of most significant trading partners' currencies in terms of trade volume with the United States and because they are all developed economies that have relatively stable exchange rates against each other and against the U.S. dollar over time periods longer than one year or so (which makes them suitable for constructing an index).