Welcome to our breakdown of the U.S. Dollar Index (DXY or USDX). Understanding the DXY allows market participants to build a solid macroeconomic perspective because it nicely displays the state of U.S. Dollar compared to the currencies of other developed world markets. If we can learn how DXY is trading and why, we can capitalize on broad market trends.
What is U.S. Dollar Index?
The U.S. dollar index is a measure of the value of the United States dollar measured against a basket of currencies from major U.S. trading partners. The basket includes six currencies, which are the Euro, the Japanese yen, the British pound, the Canadian dollar, the Swedish krona, and finally the Swiss franc. The Euro makes up roughly 57% of the basket while the remaining currencies contribute individually between 3% and 13%. The index was created by the U.S. Federal Reserve in 1973 and is maintained today by Intercontinental Exchange Inc. (ICE). ICE Futures U.S. administers, calculates, and distributes the USDX final data product. ICE assumed this role in 1985 with the inception of futures trading on the U.S. Dollar Index. The symbol USDX is simply a broad term which refers to the U.S. Dollar Index; it is a shorthand way of describing the index. DXY is the symbol used by the Bloomberg Terminal and other financial institutions to call up the index’s data and chart. Both USDX and DXY are not securities that can be bought directly. In many narratives, these symbols are used interchangeably.
The value of the index goes up or down when the United States dollar gains or loses value respectively compared to the other currencies. When the value of the United States dollar increases compared to foreign currencies, it is said that the U.S. dollar is “strengthening”. A dip in the U.S. dollar index would mean there is “softening” or “weakening” of the U.S. domestic currency. The index is driven by macroeconomic factors both foreign and domestic. Significant forces are inflation, deflation, and the business cycle, specifically economic growth or recessionary contractions.
How is DXY Calculated?
The calculation for the DXY value is a simple, weighted average of the US dollar exchange rates against each of the six currencies in the basket multiplied by an indexing factor. Below are the individual weights of each of the currencies making up the basket. The indexing factor is 50.1435.
Euro (EUR) - 57.6%
Japanese yen (JPY) - 13.6%
Pound sterling (GBP) - 11.9%
Canadian dollar (CAD) - 9.1%
Swedish krona (SEK) - 4.2%
Swiss franc (CHF) - 3.6%
USDX = 50.14348112 × EURUSD^-0.576 × USDJPY^0.136 × GBPUSD^-0.119 × USDCAD^0.091 × USDSEK^0.042 × USDCHF^0.036
The value of USDX is calculated every 15 seconds; real-time data is available through services such as the ICE website under a subscription access or WeBICE, another subscription service administered by Intercontinental Exchange, Inc. Delayed data is available through such institutions as Bloomberg, CNBC, Yahoo Finance, and data outlets like TradingView.
What Is The DXY Chart?
The U.S. Dollar Index is represented under the symbols DXY and USDX. These charts appear just as any other publicly traded security on an open exchange. Along the x-axis is time, and the Y axis represents the value of the index, which is a calculated ratio comparing the value of the US dollar versus a basket of six other currencies
FIGURE 1 - The U.S. Dollar Index (USDX) daily data plotted since late 2021. Note the rally since middle of July 2023.
How Can Traders Buy DXY?
Many market participants wonder how to buy DXY. Remember, DXY is the symbol that will call up a quote or chart of the U.S. Dollar Index. You cannot buy DXY directly. Rather, you must use financial instruments to trade this aspect of the global economy.
How To Trade The Dollar Index
Futures and options products leveraging the DXY are traded on the New York Board of Trade. Several pure and currency hedged exchange traded funds and mutual funds allow traders and investors to speculate on or hedge with respectively the US dollar index. The bulk of the DXY has ranged between 80 and 100 since the index was established in 1973. Extreme values have been few with an extreme high of roughly 164 in 1985 and an extreme low of roughly 70 in 2008.
Two large exchange traded funds that can be used to play a strengthening dollar are these listed here.
A well known example of a bearish fund that shorts the dollar is the Invesco DB U.S. Dollar Index Bearish Fund (UDN).
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