What Is the U.S. Dollar Index (USDX) And What Currencies are included in it
The U.S. dollar index (USDX) is a metric that quantifies the value of the U.S. dollar in reference to a basket of foreign currencies. The U.S. Federal Reserve established the USDX in 1973 following the dissolution of the Bretton Woods Agreement. ICE Data Indices, a subsidiary of the Intercontinental Exchange (ICE), is currently responsible for its maintenance.
While the six currencies that comprise the USDX are frequently identified as America’s most significant trading partners, the index has only been updated once: in 1999, when the euro supplanted the German mark, French franc, Italian lira, Dutch guilder, and Belgian franc.
As a result, the index does not accurately represent the current state of U.S. trade.
Comprehending the U.S. Dollar Index (USDX)
At present, the index is computed by including the exchange rates of six foreign currencies: the euro (EUR), Japanese yen (JPY), Canadian dollar (CAD), British pound (GBP), Swedish krona (SEK), and Swiss franc (CHF).
The euro constitutes the greatest component of the index, accounting for 57.6% of the basket. The remaining currencies in the index are weighted as follows: JPY (13.6%), GBP (11.9%), CAD (9.1%), SEK (4.2%), and CHF (3.6%).
The index was established in 1973 with a basis of 100, and its values have been expressed in relation to this base ever since. It was established shortly after the Bretton Woods Agreement was dissolved. The USD was entirely convertible to gold at a rate of $35/ounce, and participating countries settled their balances in U.S. dollars (which served as the reserve currency) as part of the agreement.
The exchange rates and their correlation with the pricing of gold were the subject of concern as a result of the USD’s overvaluation. The gold standard was temporarily suspended by President Richard Nixon, which allowed other countries to select an exchange agreement that was not based on the price of gold. However, the agreement was terminated in 1973 when numerous foreign governments elected to allow their currency rates to fluctuate.
The history of the U.S. Dollar Index (USDX)
The U.S. Dollar Index has experienced swift fluctuations throughout its history. An all-time peak of nearly 165 was achieved in 1984. In 2007, it reached its lowest point at nearly 70. The U.S. dollar index has been relatively stable between 90 and 110 over the past few years.
The index is influenced by macroeconomic factors, such as inflation/deflation in the dollar and foreign currencies included in the comparable basket, as well as recessions and economic development in those countries.
The basket of currencies has only undergone one modification since the index’s inception, when the euro supplanted numerous European currencies that were previously included in the index in 1999, including the Deutschemark, Germany’s predecessor currency.
It is probable that currencies will be replaced in the future as the index endeavors to accurately represent the main trading partners of the United States. It is probable that the Chinese yuan (CNY) and Mexican peso (MXN) will replace other currencies in the index in the future, as China and Mexico are significant trading partners of the United States.
Interpretation of the USDX
An index value of 120 indicates that the U.S. dollar has appreciated by 20% in relation to the basket of currencies during the specified period. To put it simply, an increase in the USDX indicates that the U.S. dollar is acquiring strength or value in comparison to other currencies.
Similarly, if the index is presently 80, a 20-point decrease from its initial value, it indicates that it has depreciated by 20%. The time period in question is a factor in the appreciation and depreciation results.
The Dollar Index: What Does It Tell You?
The dollar index monitors the U.S. dollar’s relative value in comparison to a collection of significant global currencies. The dollar is strengthening against the bundle when the index is increasing, and the opposite is true when the index is decreasing.
What currencies are included in the USDX basket?
The USDX monitors the relative strength of the dollar (USD) in relation to a collection of foreign currencies. The weightings have been consistent since 1973, and they were subsequently adjusted in 2002 when the euro supplanted numerous European currencies.
- Euro (EUR) – 57.6% weight
- Japanese yen (JPY) – 13.6%
- British pound sterling (GBP) – 11.9%
- Canadian dollar (CAD) – 9.1%
- Swedish krona (SEK) – 4.2%
- Swiss franc (CHF) – 3.6%
