What is the ‘U.S. Dollar Index – USDX’
The U.S. dollar index (USDX) is a measure of the value of the U.S. dollar relative to the value of a basket of currencies of the majority of the U.S.’s most significant trading partners. This index is similar to other trade-weighted indexes, which also use the exchange rates from the same major currencies.
Explaining ‘U.S. Dollar Index – USDX’
Currently, this index is calculated by factoring in the exchange rates of six major world currencies the euro, Japanese yen, Canadian dollar, British pound, Swedish krona and Swiss franc. The euro holds the most weight versus the dollar in the index, constituting about 58% of the weighting followed by the yen with about 14%. The index started in 1973 with a base of 100, and values since then are relative to this base.
Calculating U.S. Dollar Index Movements
An index value of 120 suggests that the U.S. dollar has appreciated 20% versus the basket of currencies over the time period in question. Subtracting the initial value of 100 from the current value of 120 yields 20; dividing the difference by the initial value of 100 gives an appreciation of 20%. Similarly, if the index is currently 80, falling -20 from its initial value, then the same calculation would give a depreciation of 20%. The appreciation and depreciation results are a factor of the time period in question.
History of the U.S. Dollar Index
The U.S. dollar index has risen and fallen sharply throughout its history, reaching its high point in February 1985 with a value of 164.72 and its low point in March 2008 with a value of 70.698. As of June, 2016, the index carried a value of 93.67, meaning that the U.S. dollar has depreciated versus the basket of currencies since the index started in 1973. The index is greatly affected by macroeconomic factors, including inflation/deflation in the dollar and foreign currencies included in the comparable basket as well as recessions and economic growth in those countries.
Trading the U.S. Dollar Index
It is possible to incorporate futures or options strategies on the USDX. These financial products currently trade on the New York Board Of Trade. Investors can use the index to hedge general currency moves or to speculate.
Further Reading
- Pricing US dollar index futures options: An empirical investigation – onlinelibrary.wiley.com [PDF]
- Cross-correlations between the US monetary policy, US dollar index and crude oil market – www.sciencedirect.com [PDF]
- The economic value of co-movement between oil price and exchange rate using copula-based GARCH models – www.sciencedirect.com [PDF]
- Cross-hedging foreign currency risk: empirical evidence from an error correction model – link.springer.com [PDF]
- Dollar index adjusted stock indices – papers.ssrn.com [PDF]
- Impact Analysis of US Dollar Index Volatility on Imports and Import Categories of Sri Lanka – ieeexplore.ieee.org [PDF]
