Full analysis of the US Dollar Index components: mastering this indicator allows you to predict global capital flows

Why Are Traders Paying Attention to the US Dollar Index?

If you trade forex, US stocks, or commodities, you’ve probably heard news like “Dollar Strengthening” or “US Dollar Index Reaching New Highs.” But few truly understand the logic behind this indicator.

The US Dollar Index (USDX or DXY) seems simple, but in reality, it is a “weather vane” for global capital flows. It not only influences the dollar itself but also affects gold prices, stock market movements, and the strength of the Taiwanese dollar. To make smart decisions in the financial markets, the first step is to understand the composition structure of the US Dollar Index and which currencies are driving its changes.

Components of the US Dollar Index: A Mix of Six Major Currencies

Ultimately, the US Dollar Index measures the relative strength of other major currencies against the dollar.

Specifically, the components include six currencies:

• Euro (EUR): 57.6%
• Japanese Yen (JPY): 13.6%
• British Pound (GBP): 11.9%
• Canadian Dollar (CAD): 9.1%
• Swedish Krona (SEK): 4.2%
• Swiss Franc (CHF): 3.6%

These are not randomly chosen. These six currencies represent over 24 developed countries, with the Eurozone covering 19 countries, underpinning the world’s most important economies.

So, when you see the USD index fluctuate, you’re essentially observing the relative strength of these economies.

Why Are These Currencies Chosen for the Index?

Notice that the Euro alone accounts for 57.6%, almost the sum of the other five combined. This is no coincidence.

The European economy is large; the Eurozone is the world’s second-largest economic bloc after the US. Plus, Europe’s importance in international trade and investment means the Euro carries the highest weight.

What does this imply?

Any movement in the Euro directly influences the direction of the USD index. If the European Central Bank cuts interest rates, economic data weaken, or political instability arises in Europe, these are immediately reflected in the USD index. To predict the USD index trend, monitoring the Euro’s dynamics is the top priority.

The Japanese Yen ranks second (13.6%) because Japan is the third-largest economy globally, and the Yen is often used as a safe-haven currency due to its low interest rates and high liquidity. When market risk appetite declines and investors seek safety, the Yen usually appreciates, which in turn pushes the USD index higher.

The other four currencies—GBP, CAD, SEK, CHF—together make up just over 28%, but each represents significant economies. Especially the Swiss Franc, with only a 3.6% weight, is known for its stability, financial center status, and political neutrality. The CHF is considered a safe-haven asset and can influence the index during turbulent times.

How Is the US Dollar Index Calculated?

The USD index uses a “geometric weighted average” method. In simple terms, it’s not just an average of the six currencies but a weighted calculation based on each currency’s importance.

The formula involves a fixed constant (50.14348112), set so that the USD index base period in 1985 equals 100. At each subsequent point in time, the index is recalculated based on the real-time exchange rates of the dollar against these currencies, raised to the power of their respective weights.

How to interpret the values?

• Index = 100: Same as the base period, no change
• Index = 76: 24% weaker than the base period
• Index = 176: 76% stronger than the base period

Thus, a higher index indicates a stronger dollar; a lower index suggests the dollar is weakening relative to other currencies.

How Do Changes in the USD Index Affect the Market?

Knowing the composition, the next question is: how do its fluctuations impact our investments?

When the USD index rises

This indicates the dollar is appreciating. Assets priced in USD become more expensive for foreign buyers. Commodities priced in USD (like oil and gold) tend to fall in price.

For traders:

• US stocks and bonds held in USD increase in TWD terms
• Export-oriented companies face greater pressure (goods become more expensive, competitiveness drops)
• Emerging markets with USD-denominated debt face higher repayment costs
• The TWD may depreciate, increasing import costs

When the USD index falls

The dollar weakens relative to other currencies, leading to potential capital outflows from the US seeking higher returns elsewhere. Asian stocks and emerging markets often benefit.

For Taiwanese investors:

• Foreign capital may flow into Taiwan stocks, boosting prices
• The TWD may appreciate
• If you hold US stocks or USD assets, beware of “FX losses”—a depreciating USD means converting back to TWD yields less

Relationship Between the USD Index and Gold, US Stocks, and Taiwan Stocks

US Dollar Index vs Gold

This is a classic “see-saw” relationship. Gold is priced in USD; when the dollar appreciates, buying gold requires more USD, reducing demand and lowering gold prices. Conversely, when the dollar weakens, gold prices tend to rise.

However, gold prices are also influenced by other factors (inflation, geopolitical risks, interest rates), so the USD index is just one piece of the puzzle.

US Dollar Index vs US Stocks

The relationship is more complex. Usually, capital inflows into the US boost US stocks, but if the dollar appreciates too much, it can weaken US export competitiveness, potentially dragging down the stock market. Economic context is key.

US Dollar Index vs Taiwan Stocks/TWD

Generally, when the dollar appreciates:

• Capital flows back to the US
• The TWD depreciates
• Taiwan stocks face downward pressure

But this is not a strict rule. When market confidence is high, US and Taiwan stocks and the USD can all rise together; during panic, they can all fall simultaneously.

The US Trade-Weighted Dollar Index: Another Important Indicator

Besides the USDX, the Federal Reserve (Fed) more frequently references the “US Dollar Trade-Weighted Index.”

Differences:

US Dollar Index (DXY)

• Uses only six currencies
• Compiled by ICE (Intercontinental Exchange)
• Euro has the largest weight (57.6%), more Euro-American focused
• The most commonly reported version in media

US Dollar Trade-Weighted Index

• Includes over 20 currencies, incorporating more Asian emerging market currencies (CNY, TWD, KRW, THB, etc.)
• Weighted based on actual US trade partners
• Reflects the real composition of US economic relationships
• Provides a more accurate picture of the global market situation

If you’re a general investor quickly assessing market sentiment, the USDX suffices. But if you’re involved in forex trading or macroeconomic research, the trade-weighted index offers deeper insights.

What Drives Changes in the USD Index?

1. Federal Reserve Interest Rate Policy

Rate hikes → higher US interest rates → attract global capital → USD appreciation. Rate cuts have the opposite effect. This is the most direct driver.

2. US Economic Data

Strong employment figures, CPI, GDP → US economy strengthening → USD rising. Weak data → confidence wanes → USD falling.

3. Geopolitical & International Events

Wars, political turmoil trigger safe-haven flows. The USD often benefits during chaos, sometimes strengthening as instability increases.

4. Movements of Other Major Currencies

Since the USD index includes other currencies, their depreciation can push the index higher even if the dollar itself remains unchanged.

Key Takeaways

The composition of the USD index determines its characteristics: the Euro’s dominant weight means European economic trends are most influential; the other five currencies represent different regions’ economic strength.

Understanding this composition allows you to quickly gauge the likely direction of the USD index. Combining this with Fed policies, economic data, and geopolitical factors helps you build your own USD index analysis framework.

For forex traders, cross-border asset investors, or those simply wanting to predict TWD movements, mastering the logic behind the USD index components is an essential foundational skill.