Global Financial Thermometer: In-Depth Analysis of the US Dollar Index, an Essential Indicator for Mastering Investment Trends

Do You Really Understand the US Dollar Index?

Open financial news, and you’ll often see headlines like “US Dollar Index Hits New High” or “Risk of US Dollar Depreciation,” but what exactly is the US Dollar Index? Why is it so important? Many investors are actually somewhat familiar with this concept but not fully understanding it.

In fact, the US Dollar Index (abbreviated as USDX or DXY) is like a thermometer for the global financial markets. As the world’s primary trading currency, fluctuations in its relative strength can influence a wide range of assets, including gold, crude oil, stocks, bonds, and more.

If you want to achieve steady profits in forex, commodities, or stock investments, understanding the meaning and operational logic of the US Dollar Index is definitely fundamental.

What Exactly Is the US Dollar Index?

When watching the stock market, we often track indices like the “S&P 500,” “Dow Jones Industrial Average,” or “NASDAQ,” which represent the overall performance of a basket of stocks.

The US Dollar Index works on a similar principle, but instead of measuring stocks, it gauges the strength of the dollar relative to other major currencies. Simply put, it answers the question: “In the international market, is the dollar appreciating or depreciating right now?”

This index includes six major international currencies:

• Euro (EUR) — the largest component, about 57.6%
• Japanese Yen (JPY) — about 13.6%
• British Pound (GBP) — about 11.9%
• Canadian Dollar (CAD) — about 9.1%
• Swedish Krona (SEK) — about 4.2%
• Swiss Franc (CHF) — about 3.6%

These six currencies represent over 24 developed economies. The Eurozone alone has 19 countries; Japan is the third-largest economy globally; the UK, Canada, and Switzerland are also key economic centers. This is why the US Dollar Index holds an unshakable position in the global financial market.

How Do Fluctuations in the US Dollar Index Affect Your Investments?

Chain reaction when the US Dollar Index rises

When the US Dollar Index climbs, it indicates that the dollar is strengthening in the international market, while other major currencies (like the euro and yen) weaken comparatively.

Impact on the global market:

• Commodities priced in dollars (oil, gold, bulk commodities) will “appear cheaper.” This is because purchasing these commodities with a strong dollar requires less money. Meanwhile, capital flows accelerate into the US market, making US bonds, US stocks, and other dollar-denominated assets more attractive.

Impact on Taiwanese investors:

• Export-oriented companies face pressure as their products become less competitive internationally and pricing power diminishes.
• The foreign exchange market may see the New Taiwan Dollar (NTD) depreciate relative to the dollar.
• If you hold USD assets (US stocks, USD fixed deposits), you benefit from dollar appreciation when converting back to NTD.

Risks for emerging markets:

Many developing countries carry large dollar-denominated debts. When the dollar appreciates, repayment becomes more burdensome, potentially triggering debt crises.

Opportunities when the US Dollar Index declines

When the dollar weakens, market confidence in the dollar drops. Capital begins to withdraw from dollar assets and seek other investment opportunities, especially in emerging markets and Asia.

Potential benefits for Taiwan:

• Overseas funds flow into Taiwan stocks, boosting the stock market and often pushing the index higher.
• The strengthening of the NTD reduces import costs but can weaken export competitiveness.
• Holders of USD assets should watch out for “exchange loss” risks — a depreciating dollar means your USD assets, when valued in NTD, will shrink.

Deep Dive: How Is the US Dollar Index Calculated?

The US Dollar Index uses a “geometric weighted average” method, not a simple average. The weights of each currency are determined based on their country’s economic size, international trade volume, and currency influence.

The reason why the euro accounts for over half (57.6%) is mainly because:

• The Eurozone has a large economy, second only to the US globally.
• Many European countries are active in international trade.
• The euro is the second-largest reserve currency worldwide.

The Japanese yen ranks second (13.6%), reflecting Japan’s position as the third-largest economy and the yen’s role as a “safe-haven” currency in international markets.

A key insight: Since the euro has such a large weight, any economic developments or policy changes by the European Central Bank directly impact the US Dollar Index. When you see the dollar fluctuate sharply, it often signals significant economic events in Europe.

Interpreting the index values

• Index = 100: baseline, no change
• Index = 76: down 24% from the base period, dollar has depreciated
• Index = 176: up 76% from the base period, dollar has appreciated

Higher value = stronger dollar; lower value = weaker dollar in the international market

What Factors Drive Changes in the US Dollar Index?

1. US Federal Reserve’s interest rate decisions

This is the most direct influence. When the Fed raises or cuts interest rates, it directly affects the attractiveness of dollar assets.

Rate hikes → US interest rates rise → global capital flows into the US → US Dollar Index rises

Rate cuts → US interest rates fall → capital flows out of the US → US Dollar Index falls

Every Fed meeting is closely watched because of this reason.

2. US economic data

Employment figures (non-farm payrolls, unemployment rate), CPI inflation data, GDP growth rate, and other indicators directly reflect the health of the US economy.

Strong data → investors optimistic about the US economy → buy dollars → Index rises

Weak data → market confidence declines → dollar faces pressure → Index falls

3. Geopolitical events and black swan incidents

Wars, political crises, regional conflicts, and other uncertainties trigger global risk aversion. During such times, markets rush to buy assets considered “safe havens.” The dollar, with its liquidity and global recognition, often becomes the first choice.

This explains why sometimes “the more chaotic, the stronger the dollar” — it’s not a contradiction but market risk-averse logic.

4. Performance of other major currencies

Remember, the US Dollar Index is a relative measure; it compares the dollar against six other currencies.

When the euro or yen depreciate due to economic recession, loose policies, or political instability in their respective countries, even if the dollar itself doesn’t appreciate, the US Dollar Index will passively rise.

Simply put: when others’ currencies weaken, it can make the dollar index look “stronger.”

The Interaction Between the US Dollar Index and Global Assets

US Dollar Index vs Gold

This is the classic “see-saw” relationship:

• Dollar appreciation (index rises) → cost of buying gold in dollars increases → Gold prices fall
• Dollar depreciation (index falls) → cost of buying gold in dollars decreases → Gold prices rise

But note, gold is also influenced by inflation expectations, geopolitical risks, wars, and other factors, so it’s not solely determined by the dollar index.

US Dollar Index vs US Stocks

The relationship is more complex and not simply positive or negative:

• Sometimes dollar appreciation → capital inflows into the US → stock market rallies
• But if the dollar becomes too strong → hurts US export competitiveness → drags down stocks

For example, in March 2020, during the global stock market crash, the dollar surged to 103 due to risk aversion. Later, as the US faced the pandemic and the Fed flooded the market with liquidity, the dollar quickly weakened to 93.78.

Thus, the relationship between US stocks and the dollar depends on the current economic context and policy environment; it’s not a straightforward linear correlation.

US Dollar Index vs Taiwan Stock Market and NTD

Broadly:

• Dollar appreciation (index rises) → capital flows back to the US → NTD depreciates → Taiwan stocks face downward pressure
• Dollar depreciation (index falls) → capital flows into Asia → NTD appreciates → Taiwan stocks may benefit

But this is not an absolute rule. Sometimes, with optimistic global economic outlooks, US stocks, Taiwan stocks, and the dollar can rise together; during black swan events, all markets may fall together.

Essential Detail: US Dollar Index vs Trade-Weighted US Dollar Index

Many investors only know to look at the “US Dollar Index” (DXY), but in fact, the Federal Reserve (Fed) more often references the “Trade-Weighted US Dollar Index” when assessing the dollar’s true strength.

US Dollar Index (DXY)

• Measures the dollar against six major currencies
• Calculated by ICE (Intercontinental Exchange)
• Euro has the largest weight (57.6%), which introduces a Euro-American bias
• The most commonly cited indicator by media and investors

Trade-Weighted US Dollar Index

• Calculated based on actual US trade partner currencies
• Includes over 20 currencies, covering emerging Asian markets (CNY, MXN, KRW, TWD, THB, etc.)
• Main reference for the Fed
• Provides a more accurate reflection of the dollar’s role in global trade

Implication for investors:

If you just want a quick sense of market sentiment, looking at the US Dollar Index is enough. But if you’re doing macroeconomic research, forex trading, or want to understand Fed policy logic deeply, the trade-weighted index offers a more realistic, closer-to-market perspective.

What Does the US Dollar Index Mean for Investors in Practice?

What is the US Dollar Index? Essentially, it’s a signal light for global capital flows.

When you observe the trend of the dollar index, you’re also watching:

• The strength of global risk aversion
• The relative economic health of the US and other developed economies
• The direction of international capital flows
• Potential opportunities in commodities, stocks, bonds, and more

For US stock investors, dollar appreciation can bring currency gains but may also hurt US exporters. For Taiwan investors, a weaker dollar often signals foreign capital inflow. For forex traders, the dollar index is the core decision-making reference.

No matter what your investment portfolio looks like, mastering the patterns of the US Dollar Index can help you better judge market trends and plan your investment strategies in advance.