U.S. Dollar Index (USDX)

Definition

The U.S. Dollar Index (USDX) is a measure of the value of the U.S. dollar relative to a basket of foreign currencies. It is a weighted geometric mean of the dollar’s value compared to: Euro, Japanese Yen, British Pound, Canadian Dollar, Swedish Krona, and Swiss Franc. The higher the USDX, the stronger the U.S. dollar is in comparison to other currencies.

Phonetic

The phonetics of the keyword “U.S. Dollar Index (USDX)” is: (y)oo – es – dah – ler – in – dex – (y)oo – es – dee – eks

Key Takeaways

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1. Definition: The U.S. Dollar Index (USDX) is a measure of the value of the U.S. dollar relative to a basket of foreign currencies. It was introduced in 1973 after the decoupling of the dollar from gold, providing a standardized value for the dollar as compared to other major economies.
2. Index Composition: The USDX is calculated using a geometric mean and includes six major world currencies: the euro, Japanese yen, British pound, Canadian dollar, Swedish krona, and Swiss franc. These currencies are given different weights with the Euro having the largest at 57.6%.
3. Significance: Traders, investors, and policymakers monitor changes in the USDX as a general indicator of the dollar’s international value. Movements in the USDX can provide insights about the economic health of the U.S. and signal potential impacts on other financial assets like commodities and equities which are priced in dollars.

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Importance

The U.S. Dollar Index (USDX) is crucial in the world of business and finance as it serves as a barometer for the general value and strength of the U.S. dollar against a basket of six major currencies. These includes Euro, Japanese yen, Pound sterling, Canadian dollar, Swedish krona, and Swiss franc. The tracking and analysis of this index allow investors, economists, and policymakers to evaluate the U.S.’ economic health, make informed decisions about investments and monetary policies, as well as to predict potential impacts on global financial markets. A stronger index means the U.S. dollar is doing well relative to the other currencies while a weaker index signifies the underperformance of the dollar. This interpretation can influence the cost of imports and exports, interest rates, inflation, and overall financial sentiment.

Explanation

The U.S. Dollar Index (USDX) serves as a reliable benchmark, offering a measure of the value of the U.S. dollar relative to a basket of six major world currencies. These include the Euro, Japanese Yen, British Pound, Canadian Dollar, Swedish Krona, and Swiss Franc. With the Euro having the greatest weight, trade values of these respective economies significantly influence this index. Investors, financial institutions, and government bodies globally refer to the USDX to gauge the value of the dollar in the global economic landscape. The purpose of the USDX extends beyond merely indicating the dollar’s value. It is a critical tool used by traders for speculating on the direction of the dollar by trading in the currency futures market. Financial institutions and multinational corporations use it as a hedge against currency fluctuations that may impact their interest in international markets or overseas operations. Thus, the USDX is a dynamic financial instrument used for diverse purposes, from investment strategies to analysing general economic health and policy implications.

Examples

1. Foreign Trade: If you’re an exporter from a non-US country, let’s say Australia, and you want to export your goods to the U.S., you would monitor the US Dollar Index closely. When the Index is high, it means the U.S. dollar is strong, thus you’ll receive more Australian dollars, as your counterpart are paying in U.S. dollars. In 2020, during the early stages of the Covid-19 pandemic, the U.S. Dollar Index rose significantly as global investors sought safety in the U.S. dollar, this meant a boost for exporters to U.S. from other countries.2. Invest in Commodities: Commodities like oil and gold are generally priced in U.S. dollars. So, the strength of the dollar can affect the price of these commodities. For instance, during 2014-2015 when the American economy showed signs of strengthening, the U.S. Dollar Index rose. This caused commodities like gold and oil to become more expensive in other currencies, leading to a drop in demands and eventually a fall in their prices.3. Forex Trading: Currency traders and investors use the USDX as a benchmark to gauge the value of the US dollar. In 2017, for instance, when the US Dollar Index was low, currency traders who were holding other currencies like the Euro or Japanese yen could have taken the opportunity to buy the U.S. Dollar and later sell it when the Index rose, making a profit from the transaction.

Frequently Asked Questions(FAQ)

Related Finance Terms

• Foreign Exchange Market (Forex)
• Currency Value
• Exchange Rates
• Trade Weighted US Dollar Index
• Major Currency Pairs

Sources for More Information

• Investopedia
• MarketWatch
• Bloomberg
• FXStreet