Mastering the US Dollar Index Fluctuations: A Must-Know Global Financial Indicator for Investors

The Core Composition of the US Dollar Index: The Power Play of Six Major Currencies

Many investors often hear about a “strengthening US Dollar Index” or “USD appreciation/depreciation,” but they may not fully understand what this indicator truly represents. The US Dollar Index (USDX or DXY) is essentially a relative index tracking the strength of the dollar against a basket of six major international currencies. It reflects the overall performance of the dollar through exchange rate changes with these currencies.

These six currencies are the Euro, Japanese Yen, British Pound, Canadian Dollar, Swedish Krona, and Swiss Franc. Among them, the Euro accounts for over 57%, making it the most influential component in the USDX. The composition and weighting are set because these currencies represent economies totaling over 24 developed countries, giving the USDX high authority and representativeness in global financial markets.

The Euro’s highest weight is mainly due to the economic size and trading volume of the 19 Eurozone countries. The Yen ranks second (13.6%), reflecting Japan’s position as the third-largest economy globally. The Pound, CAD, SEK, and CHF have relatively lower weights, but the Swiss Franc is still significant for its reputation for stability and safety, especially during risk-off periods.

How the US Dollar Index is Calculated: The Logic of Geometric Weighted Average

The USDX is calculated using the geometric weighted average method, which assigns different weights based on the economic size, trading volume, and influence of each country’s currency. In simple terms, the USDX is not a straightforward arithmetic mean of the six currencies but a result derived from a complex mathematical model that weights the exchange rates of the dollar against each currency.

Numerical interpretation:

• 100 = baseline level, no change
• 76 = 24% below baseline, dollar has depreciated relative to the basket
• 176 = 76% above baseline, dollar has appreciated relative to the basket

Therefore, a higher USDX indicates a stronger dollar in the international market; a lower USDX indicates a weaker dollar. This is especially important for forex traders and cross-border investors.

The Dual Impact of USDX Fluctuations

When the US Dollar Index rises

An increasing USDX means the dollar is appreciating against other major currencies. In this scenario:

Positive effects on the US:

• Lower costs for imported goods, boosting US consumers’ purchasing power
• Global capital flows back into the US due to the attractiveness of dollar-denominated assets
• Helps curb US inflation pressures and supports economic growth

Challenges for other regions:

• Export-oriented economies like Taiwan, South Korea face reduced competitiveness as their goods become more expensive
• Emerging markets with dollar-denominated debt see increased repayment burdens
• Capital may flow out of Asian markets

When the US Dollar Index falls

A declining USDX indicates weakening dollar momentum, and market risk appetite may increase:

Potential impact on Taiwan market:

• International hot money may flow into emerging markets, supporting Taiwan stocks
• The New Taiwan Dollar (NTD) may face appreciation pressure, lowering import costs but reducing export competitiveness
• USD asset holders should be cautious of exchange losses; a depreciating dollar means reduced value when converting back to local currency

The Relationship Between USDX and Global Financial Assets

Fluctuations in the USDX are not isolated; they can trigger chain reactions across various assets:

The inverse relationship between gold and the dollar

Gold and the dollar often exhibit a “see-saw” movement—when the dollar appreciates, gold priced in USD becomes more expensive, reducing demand; when the dollar depreciates, the opposite occurs. However, geopolitical tensions, inflation expectations, and other factors also influence gold prices independently, so the USDX alone cannot provide a complete picture.

The Complex Interaction with US Stock Markets

The relationship between the dollar and US stocks is not simply positive or negative. A rising dollar can attract global capital into US markets, boosting stocks; but if the dollar appreciates too much, it may weaken US export competitiveness and drag down stock performance. Investors should analyze the broader economic context.

Capital Flows in Taiwan Stocks and the New Taiwan Dollar

When the USDX rises, international capital tends to flow back into the US, exerting downward pressure on Taiwan stocks, and the NTD may depreciate. Conversely, when the USDX falls, the attractiveness of Asian emerging markets increases, potentially benefiting Taiwan stocks and the NTD. However, during global risk events, assets may decline collectively, and the dollar may strengthen as a safe haven.

Four Key Factors Driving USDX Volatility

Federal Reserve Interest Rate Policy

The most direct driver of the USDX. Rate hikes attract global capital seeking higher yields, pushing the USDX higher; rate cuts lead to capital outflows and a lower index. Every Fed decision can trigger market volatility.

US Economic Data

Indicators like employment figures (non-farm payrolls, unemployment rate), CPI inflation, and GDP growth directly reflect the USD’s fundamentals. Strong data boosts the dollar; weak data weighs on it.

Geopolitical and International Events

Wars, political turmoil, regional conflicts can trigger risk aversion. In uncertain environments, markets often choose the dollar as the preferred safe-haven asset, causing the USDX to rise.

Movements of Other Major Currencies

Since the USDX is a relative index, if currencies like the Euro or Yen weaken due to domestic economic or policy reasons, the USDX can rise even if the dollar itself remains unchanged.

The Difference Between the US Dollar Index and the Trade-Weighted US Dollar Index

Investors often confuse these two similar concepts:

US Dollar Index (DXY)

• Compiled by ICE (Intercontinental Exchange), most widely used
• Based on the exchange rates of the dollar against six major currencies
• The Euro has a high weight (57.6%), reflecting a Eurocentric perspective

Trade-Weighted US Dollar Index

• Primarily developed and used by the Federal Reserve
• Calculated based on actual US trade partner currencies
• Covers over 20 currencies, including CNY, KRW, TWD, THB, and other Asian emerging market currencies
• Provides a more accurate reflection of the dollar’s real influence in global trade

Investor takeaway: For most investors, monitoring the USDX is sufficient to gauge market sentiment; but for forex traders, macroeconomic research, or understanding Fed policy logic, the trade-weighted index offers deeper insights.

Practical Investment Recommendations

The USDX serves as a “barometer of global capital flows,” offering valuable reference for investment decisions. Tracking its trends can help you:

• Assess asset valuation: Monitor USDX changes to anticipate relative valuations of gold, crude oil, stocks, etc.
• Evaluate exchange rate risk: Investors holding overseas assets should watch USDX movements to prevent currency losses.
• Capture capital flows: Reversals in the USDX often coincide with reallocation opportunities in international capital.

Especially in forex trading, understanding the composition and volatility logic of the USDX has become an essential tool. Grasping how the index is constructed, how it’s calculated, and what drives its fluctuations are prerequisites for developing effective trading strategies.

Whether for long-term asset allocation or short-term trading, investors should maintain ongoing attention to the USDX.