Macro and rates
The US Dollar Index (DXY): What It Measures and Why It Matters
How the US Dollar Index is built from six currencies, its weights and history, what it leaves out, and why its moves run through gold, oil and emerging markets.
Updated · 3 min read
What the index is
The US Dollar Index, quoted as DXY, measures the dollar against a basket of six currencies. It was created in 1973, after the end of the Bretton Woods system, with a starting value of 100, and the basket has been changed only once, when the euro replaced the European currencies it absorbed in 1999. It is maintained by ICE, which also lists the futures contract on it.
The weights have been fixed since 1999:
| Currency | Weight |
|---|---|
| Euro | 57.6% |
| Japanese yen | 13.6% |
| British pound | 11.9% |
| Canadian dollar | 9.1% |
| Swedish krona | 4.2% |
| Swiss franc | 3.6% |
The index is a geometric mean: each exchange rate is raised to its weight and the results multiplied, with a constant so that the 1973 base equals 100. A rising DXY means the dollar is buying more of the basket.
DXY = 50.14348112 × EURUSD^(−0.576) × USDJPY^0.136 × GBPUSD^(−0.119) × USDCAD^0.091 × USDSEK^0.042 × USDCHF^0.036
The negative exponents are the pairs quoted with the dollar second. The index reached its high of about 165 in February 1985, before the Plaza Accord, and its low of about 71 in March 2008.
What it leaves out
The basket is Europe, Japan and Canada. It has no Chinese yuan, no Mexican peso, no Korean won and no Indian rupee, although China and Mexico are two of the United States' three largest trading partners. With the euro at nearly 58% and the pound, krona and franc moving largely with it, DXY is in practice an inverse of the euro to about three quarters, and a day when the dollar strengthens against Asian currencies but not against the euro barely registers.
The Federal Reserve's trade-weighted broad dollar index, with twenty-six currencies weighted by trade, is the better measure of the dollar's effective value. DXY remains the one that trades, that charts and that the market means when it says "the dollar", so both are worth watching: DXY for the price action, the broad index for the economics.
Why the dollar moves
Over months the dollar follows interest rate differentials: when US yields rise relative to European and Japanese yields, money moves into dollars to earn them, and the real two-year differential between the US and its trading partners explains much of the movement. Over weeks it follows the relative surprises in the data and the relative tone of the central banks.
Over days it follows risk. The dollar smile describes the pattern: the dollar is strong when the US economy outperforms the rest of the world, strong again in a global crisis when everyone needs dollars to settle debts, and weak in the middle, when global growth is synchronised and investors are comfortable owning other currencies. In a sharp equity sell-off, DXY usually rises alongside Treasuries and the yen.
What a strong dollar does
Gold and oil are priced in dollars, so a stronger dollar makes them dearer in every other currency and tends to push their dollar prices down, with gold the more reliable of the two inverses. Emerging markets borrow in dollars and a strong dollar raises the local cost of that debt, which is why emerging-market equities and bonds suffer most in a dollar rally. US multinationals earn roughly a third to two fifths of their revenue abroad, and a stronger dollar shrinks those earnings when translated, which shows up as a headwind in the quarterly results of the large technology and consumer names. And for US importers and for inflation, a strong dollar is a mild disinflationary force.
On the desk
The currencies page carries the major pairs live beside a converter, and the DXY notebook weighs the releases and market checks that move the dollar into a verdict that is re-scored every minute, with the eleven currency pairs the desk covers each given the same treatment.
Questions
- What currencies are in the US Dollar Index?
- Six: the euro at 57.6%, the Japanese yen at 13.6%, the British pound at 11.9%, the Canadian dollar at 9.1%, the Swedish krona at 4.2% and the Swiss franc at 3.6%. The weights have been fixed since the euro's introduction in 1999.
- Why does DXY move with the euro?
- The euro is almost 58% of the basket, and the pound, krona and franc tend to move with it, so about three quarters of the index is European currencies. In practice DXY behaves like an inverse of EUR/USD most of the time.
- What is the dollar smile?
- The observation that the dollar is strong at both extremes of the global cycle: when the US economy outperforms the rest of the world, and in a global crisis when investors need dollars. It is weak in between, when growth is synchronised and risk appetite is healthy.
- What does a strong dollar mean for gold and stocks?
- Gold is priced in dollars and tends to fall when the dollar rises. US companies with large foreign sales earn less when their foreign revenue is translated into a stronger dollar. Emerging markets that borrow in dollars face higher debt costs, so their assets usually fall in a dollar rally.
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