What Is the U.S. Dollar Index (USDX)?

The U.S. Dollar Index (USDX) serves as a crucial metric for evaluating the strength of the U.S. dollar in comparison to a selection of foreign currencies. Originally introduced in 1973 following the dissipation of the Bretton Woods Agreement, the USDX is overseen by ICE Data Indices, a subsidiary under the Intercontinental Exchange (ICE) umbrella.

While the USDX primarily comprises currencies from what are deemed America’s major trading partners, it has only undergone one modification since inception in 1999, incorporating the euro and phasing out the German mark, French franc, Italian lira, Dutch guilder, and Belgian franc. Consequently, the index may not precisely mirror current U.S. trade dynamics.

Key Takeaways

• The U.S. Dollar Index assesses the dollar’s value against a basket of six foreign currencies.
• These currencies include the Euro, Swiss franc, Japanese yen, Canadian dollar, British pound, and Swedish krona.
• Established post the disbandment of the Bretton Woods Agreement in 1973, the USDX began with a base value of 100, with subsequent values measured relative to this benchmark.
• Its value serves as a reliable indicator of the dollar’s standing in global markets.

Understanding the U.S. Dollar Index (USDX)

The USDX is presently computed by considering the exchange rates of six key foreign currencies, specifically the euro (EUR), Japanese yen (JPY), Canadian dollar (CAD), British pound (GBP), Swedish krona (SEK), and Swiss franc (CHF).

Notably, the euro bears the most significant weight in the index at 57.6%, followed by JPY (13.6%), GBP (11.9%), CAD (9.1%), SEK (4.2%), and CHF (3.6%).

The USDX was established with a base of 100 at its inception in 1973, coinciding with the termination of the Bretton Woods Agreement. This agreement stipulated that U.S. dollar balances could be settled by participating countries, with the USD pegged to gold at $35 per ounce.

Concerns over USD overvaluation contributed to the suspension of the gold standard by President Richard Nixon, prompting a shift in international currency exchange mechanisms that concluded the agreement as various nations opted for floating currency rates in 1973.

History of the U.S. Dollar Index (USDX)

Since its inception, the U.S. Dollar Index has experienced notable fluctuations, hitting an all-time peak near 165 in 1984 and a low of about 70 in 2007. Recent years have seen the index maintain a somewhat stable range between 90 and 110.

Various macroeconomic factors influence the USDX, encompassing inflation/deflation in the U.S. and other included foreign currencies, in addition to recessions and economic growth within these countries.

The USDX’s currency composition was modified solely once in 1999, replacing multiple European currencies with the euro. Future adjustments may see currencies like the Chinese yuan (CNY) and Mexican peso (MXN) being added to better represent significant U.S. trading ties.

The USDX’s weightings, established in 1973, have a large emphasis on the euro due to fixed 1973 exchange rates, making it particularly reactive to euro fluctuations.

Interpreting the USDX

A USDX value of 120 implies a 20% appreciation of the USD against the basket of currencies over the specified period, signaling a strengthening dollar. Conversely, a reading of 80 denotes a 20% depreciation, reflecting a weakened USD.

The degree of appreciation or depreciation is contingent on the time frame under scrutiny.

How to Trade the USDX

Traders leverage the U.S. Dollar Index to track USD value shifts against a select currency basket within one transaction, offering a hedge against dollar-related risks. Various trading strategies, including futures and options, can be implemented based on the USDX.

Financial instruments tied to the USDX trade on the New York Board of Trade, enabling investors to speculate or hedge against currency movements. Additionally, the index can be accessed through ETFs and mutual funds.

Noteworthy ETFs linked to the USDX include the Invesco DB U.S. Dollar Index Bullish Fund (UUP) and the Wisdom Tree Bloomberg U.S. Dollar Bullish Fund (USDU), which provide varying exposures to USD fluctuations.

For investors looking to bet against the dollar, Invesco offers the U.S. Dollar Index Bearish Fund (UDN), a vehicle that gains value as the USD weakens.

What Does the Dollar Index Tell You?
The dollar index tracks the relative value of the U.S. dollar against a basket of important world currencies. If the index is rising, it means that the dollar is strengthening against the basket – and vice-versa.

What Currencies Are in the USDX Basket?
The USDX tracks the dollar’s (USD) relative strength against a basket of foreign currencies. The weightings have been fixed since 1973 (and later adjusted in 2002 when the euro replaced many European currencies):

• Euro (EUR) – 57.6% weight
• Japanese yen (JPY) – 13.6%
• Pound sterling (GBP) – 11.9%
• Canadian dollar (CAD) – 9.1%
• Swedish krona (SEK) – 4.2%
• Swiss franc (CHF) – 3.6%

How Do You Calculate the USDX Index Price?
The USDX is based on a basket of six currencies with different weightings (see above). The index calculation is simply the weighted average of the U.S. dollar exchange rates against these currencies, normalized by an indexing factor (which is ~50.1435).

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

The Bottom Line

The U.S. Dollar Index (USDX) acts as a reflective barometer for assessing the strength of the U.S. dollar against a diversified mix of prominent currencies. Established in 1973, the index remains a relevant tool for gauging the U.S. economy’s health, enabling traders to speculate on dollar value variations or safeguard against currency-related exposures.