The US Dollar Index
What is the US dollar index and why is it important?
If you trade US trade stocks, you are likely to be familiar with indices like the S&P 500, Nasdaq composite index and the Dow Jones industrial average. But did you know that the US dollar has an index of its own. This is known as the US dollar index and usually trades under the ticker symbol USDX, DXY or DX depending on the exchange and the type of instrument being traded.
The US Dollar Index is weighted average basket of foreign currencies against the dollar. This index is a useful tool for measuring the US dollars global strength. The index rises when the US dollar gains strength against the other currencies and falls when the dollar weakens. The US dollar index consists of six foreign currencies. These are the:
- Euro (EUR)
- Japanese Yen (JPY)
- British Pound (GBP)
- Canadian Dollar (CAD)
- Swedish Krona (SEK)
- Swiss Franc (CHF)
So now that we know what currencies are included in the index you may be wondering what weight each currency holds in the index. The weighting is relative to the size of the respective economy in the global market. Each currency in the index has the following weight relative in the index:
Euro (EUR): 57.6% weight
Japanese yen (JPY): 13.6% weight
Pound sterling (GBP): 11.9% weight
Canadian dollar (CAD): 9.1% weight
Swedish krona (SEK): 4.2% weight
Swiss franc (CHF): 3.6% weight
Where is the index currently trading?
The US dollar index is currently the highest it has been since 2002. But what is behind the rise in the dollar?
Inflation is currently at a multi-decade high in the United States and the most recent consumer-price index inflation data showed that inflation is currently at a whopping 9.1%. This puts pressure on the Federal Reserve to act more aggressively to tighten monetary policy, with expectations of interest rate increases to follow.
Stocks are selling off amid the risk that these policy moves could cause a recession, with bond yields rising in turn as traders demand more returns against government debt with inflation running so hot. With the yields on the 2-year and 10-year U.S. Treasury notes each pushing to new decade highs, cash is among the winners in this environment. As a result of investors selling stocks in favour of cash this has resulted in the dollar strengthening significantly against its peers and has caused the USDX to reach a multi decade high.