What index is used to measure the strength of the US Dollar?

What is the US Dollar Index?

The US Dollar Index (USDX) is a measure of the strength of the US Dollar based on the value of a basket of foreign currencies.

Under the current exchange rate regime, it is impossible to directly measure the absolute strength of a currency. We can only determine the relative value of a currency through another foreign currency. Typically, the value of a currency is compared to the USD. For instance, if GBP/USD increases by 0.2%, it means that the British Pound has strengthened by 0.2%.

So, how is the value of the US Dollar measured? We cannot use another single currency to determine the value of the greenback, which is why the USDX was created.

The USDX was invented in 1973 by the Intercontinental Exchange (ICE) after the collapse of the Bretton Woods monetary system. Therefore, the full name of the US Dollar Index can be called the ICE US Dollar Index.

What index is used to measure the strength of the US Dollar?

USDX, DXY, and DX: What’s the Difference?

  • USDX is the official abbreviation of the US Dollar Index and is registered by ICE.
  • DXY is the ticker for the US Dollar Index on platforms like Bloomberg Terminal or TradingView. Although not the official abbreviation, DXY has gradually been accepted as a shorthand for the index.
  • DX is the ticker for the USDX futures contract traded on ICE. DX contracts are issued quarterly with a one-year term, meaning at any given time, there are always four DX contracts being traded, expiring in the nearest March, June, September, and December. They are denoted as DXH, DXM, DXU, DXZ along with the expiration year.

The Currency Basket of the USDX

The USDX is built based on six different currency pairs against the USD, including EUR, JPY, GBP, CAD, SEK, and CHF, with weights as shown below.

Currency Weights in the DXY Index

The USDX was set at 100 on the reference day, which is the first day the index was effective. From there, you can construct the formula for the USDX as follows:

USDX=50.14348112×(EUR/USD)−0.576×(USD/JPY)0.136×(GBP/USD)−0.119×(USD/CAD)0.091×(USD/SEK)0.042×(USD/CHF)0.036text{USDX} = 50.14348112 times (text{EUR/USD})^{-0.576} times (text{USD/JPY})^{0.136} times (text{GBP/USD})^{-0.119} times (text{USD/CAD})^{0.091} times (text{USD/SEK})^{0.042} times (text{USD/CHF})^{0.036}USDX=50.14348112×(EUR/USD)−0.576×(USD/JPY)0.136×(GBP/USD)−0.119×(USD/CAD)0.091×(USD/SEK)0.042×(USD/CHF)0.036

You can easily track the DXY index on trading platforms like TradingView, Bloomberg, etc. The index is calculated and updated by ICE every 15 seconds.

Due to the high trading volume of the Euro and the Dollar, the Euro’s weight in the USDX is quite significant, making up more than half of the currency basket. Generally, when the Euro rises, the USDX falls and vice versa, leading some to refer to the USDX as the Anti-Euro Index.

Fun Fact

The Euro was introduced in 1999, after the DXY index was created. Before the Euro was included in the USDX currency basket, the index was based on 10 different foreign currencies, including JPY, CHF, GBP, CAD, SEK as mentioned, plus the German Mark, French Franc, Belgian Franc, Italian Lira, and Dutch Guilder. The USDX currency basket has not been restructured since 1999.

Due to the high weight of the Euro, changes in the trading volume of currencies each year, and the introduction of more currencies into the market, several other Dollar Indexes have been developed with a more balanced currency basket and updated annually, such as the Bloomberg Dollar Index by Bloomberg and the Trade-Weighted Dollar Index by Fred. However, the ICE Dollar Index remains the most widely used and recognized.