The Dollar Index is an indicator of the value of the American dollar against a basket of foreign currencies. This basket consists of six different currencies, with each currency’s weight determined based on its significance in U.S. foreign trade.

Currencies and Their Weights in the Dollar Index:

• Euro – 57.6% (Largest Share)

• Japanese Yen – 13.6%

• British Pound – 11.9%

• Canadian Dollar – 9.1%

• Swedish Krona – 4.2%

• Swiss Franc – 3.6%

History and Purpose

The Federal Reserve (Fed) created the Dollar Index in 1973 to track the value of the U.S. dollar, initially setting it at 100.00 base points. Since 1985, ICE Data Indexes has been responsible for calculating the index.

This index serves as a key indicator of the strength of the U.S. dollar in global markets:

• Above 100.00 → The U.S. dollar is strong against the basket currencies.

• Below 100.00 → The U.S. dollar is weak compared to the basket currencies.

How is the Value of the Dollar Index Determined?

The value of the Dollar Index is influenced by the supply and demand of the U.S. dollar and the other currencies in the basket. Some key factors affecting the index include:

1. Interest Rates

   • Higher interest rates → Increased demand for the U.S. dollar → Higher index value.

   • Lower interest rates → Decreased demand for the U.S. dollar → Lower index value.

2. Foreign Trade

   • Increased U.S. exports → Higher demand for the U.S. dollar → Higher index value.

   • Decreased U.S. exports → Lower demand for the U.S. dollar → Lower index value.

3. Risk Factors

   • Economic, political, or geopolitical risks → Investors seek the U.S. dollar as a safe haven → Index rises.

   • High market risk appetite → Lower demand for the U.S. dollar → Index declines.

Additionally, developments in the Eurozone can significantly impact the Dollar Index, as the Euro holds the largest share (57.6%) in the basket.

Is the Dollar Index Updated?

The Dollar Index has only been updated once, in 1999, following the introduction of the Euro. Many experts argue that it no longer accurately reflects U.S. trade patterns today. Currencies like the Chinese Yuan (CNY) and Mexican Peso (MXN) could be included in future updates, given their importance in U.S. trade.

Conclusion

The Dollar Index is a crucial measure of the U.S. dollar’s performance against a basket of global currencies. Its movement provides insights into economic trends and the overall state of the U.S. economy. Monitoring this index helps investors, policymakers, and analysts understand global financial conditions and anticipate market shifts.