What is the U.S. Dollar Index?
If you’ve traded stocks, you’re familiar with all the indices available such as the Dow Jones Industrial Average (DJIA), NASDAQ Composite Index, Russell 2000, S&P 500, Wilshire 5000, and the Nimbus 2001. Oh wait, the last one is actually Harry Potter’s broomstick.
Well if U.S. stocks have an index, the U.S. dollar can’t be outdone. For currency traders like us, we have the U.S. Dollar Index (USDX).
The U.S. Dollar Index consists of a geometric weighted average of a basket of foreign currencies against the dollar.
Come again?! Okay before you fall asleep on us after that super geeky definition, let’s break it down.
It’s very similar to how the stock indices work in that it provides a general indication of the value of a basket of securities. Of course, the “securities” we’re talking about here are other major world currencies.
The Basket
The U.S. Dollar Index consists of six foreign currencies. They are the:
- Euro (EUR)
- Yen (JPY
- Cable (GBP)
- Loonie (CAD)
- Kronas (SEK)
- Francs (CHF)
Here’s a trick question. If the index is made up of 6 currencies, how many countries are included?
If you answered “6”, you’re wrong. If you answered “20”, you’re a genius.
There are 20 countries total, because there are 15 members of the European Union that have adopted the euro as their sole currency, plus the other five countries (Japan, Great Britain, Canada, Sweden, and Switzerland) and their accompanying currencies.
It’s obvious that 20 countries make up a small portion of the world but many other currencies follow the U.S. Dollar index very closely. This makes the USDX a pretty good tool for measuring the U.S. dollar’s global strength.
The USDX Components
Now that we know what the basket of currencies are, let’s get back to that “geometric weighted average” part. Because not every country is the same size, it’s only fair that each is given appropriate weights when calculating the U.S. Dollar Index. Check out the current weights:
As you can see, with 15 countries using it, the euro makes up a big chunk of the U.S. Dollar Index. The other five currencies make up less than 43 percent. .
Here's something interesting: When the euro falls, which way does the U.S Dollar Index move?
The euro makes up such a huge portion of the U.S. Dollar Index, they might as well call this index the "Anti-Euro Index". Because the USDX is so heavily influenced by the euro, people have looked for a more "balanced" dollar index. More on that later though. First, let's go to the charts!
How to Read the U.S. Dollar Index
Here’s a chart of the U.S. Holler at the Dollar Index:
First, notice that the index is calculated 24 hours a day, seven days a week. The USDX measures the dollar’s general value relative to a base of 100.000. Huh?!
Okay. For example, the current reading says 86.212. This means that the dollar has fallen 13.788% since the start of the index. (86.212 - 100.000).
If the reading was 120.650, it means the dollar’s value has risen 20.650% since the start of the index. (120.650 – 100.00)
The start of the index is March 1973. This is when the world’s biggest nations met in Washington D.C. and all agreed to allow their currencies to float freely against each. The start of the index is also known as the “base period”.
The U.S. Dollar Index Formula
This is strictly for the grown and geeky. Here is the formula to calculating USDX:
USDX = 50.14348112 × EURUSD^(-0.576) × USDJPY^(0.136) × GBPUSD^(-0.119) × USDCAD^(0.091) × USDSEK^(0.042) × USDCHF^(0.036)
Trade-Weighted U.S. Dollar Index
There is also another kind of dollar index used by the Federal Reserve. It is called the “trade-weighted U.S. dollar index”.
The Fed wanted to create an index that could more accurately reflect the dollar’s value against foreign currencies based on how competitive U.S. goods are compared against other countries.
The main difference between the USDX and the trade-weighted dollar index is the basket of currencies used and their relative weights. The weights are based on annual trade data.
Currencies and Weights
Here is the current weighting of the index:
| Euro area | 18.08 |
| Canada | 16.293 |
| Japan | 10.035 |
| Mexico | 9.823 |
| China | 13.377 |
| United Kingdom | 4.822 |
| Taiwan | 2.755 |
| Korea | 4.047 |
| Singapore | 2.061 |
| Hong Kong | 2.035 |
| Malaysia | 2.11 |
| Brazil | 1.955 |
| Switzerland | 1.412 |
| Thailand | 1.416 |
| Philippines | 0.825 |
| Australia | 1.212 |
| Indonesia | 0.878 |
| India | 1.145 |
| Israel | 1.039 |
| Saudi Arabia | 0.665 |
| Russia | 0.924 |
| Sweden | 1.167 |
| Argentina | 0.46 |
| Venezuela | 0.451 |
| Chile | 0.591 |
| Colombia | 0.423 |
| Total | 100 |
*Weights as of December 15, 2005
For more information on exchange rate indexes for the U.S. dollar, see "Indexes of the Foreign Exchange Value of the Dollar"
Weights for the broad index can be found at http://www.federalreserve.gov/releases/H10/Weights
If you’d like to see historical data, check out http://www.federalreserve.gov/releases/h10/Summary/
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