What Is the U.S. Dollar Index (USDX)?

The value of the dollar is measured in relation to a group of other currencies using an index known as the U.S. dollar index (USDX). After the failure of the Bretton Woods Agreement in 1973, the United States Federal Reserve introduced the USDX as a replacement currency. ICE Data Indices, which is a subsidiary of Intercontinental Exchange, is in charge of managing it at the present (ICE). The six countries whose currencies are included in the USDX index are widely mentioned as the United States' most significant trading partners. On the other hand, the USDX has only been updated once, and that was in 1999, when the euro was added to the index in place of the German mark, French franc, Italian lira, Dutch guilder, and Belgian Franc. As a result, the index fails to provide an accurate representation of modern business in the United States.

Which Currencies Are Included in the USDX Basket?

The USDX measures the relative strength of the US dollar (USD) versus a basket of international currencies. Since 1973 (and later amended in 2002 when the euro replaced numerous European currencies),[sources:Intercontinental Exchange] the weightings have been fixed:
  • Euro (EUR) - 57.6% weight
  • 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%

How to Calculate Dollar Index ?

Dollar Index Formula

USDX = 50.14348112 × EURUSD -0.576 × USDJPY 0.136 × GBPUSD -0.119 × USDCAD 0.091 × USDSEK 0.042 × USDCHF 0.036

  • EURUSD = Euro/USD,
  • USDJYP = USD/Japanese yen,
  • GBPUSD = Pound sterling/USD,
  • USDCAD = USD/Canadian dollar
  • USDSEK = USD/Swedish krona
  • USDCHF = USD/Swiss franc
  Taking the U.S. dollar as the base currency, the value of each currency is multiplied by its weight, which is a positive number. When the U.S. dollar is the quote currency, it is a negative number. The above equation gives the most weight to the Euro, then the Japanese yen, and finally the British pound. Only the Euro and the Pound are quoted in terms of the U.S. dollar. This means that the dollar is the base currency. For Example  One Euro might be worth $1.13. The prices of the others are given in terms of how many units one U.S. dollar can buy. Let's say  A dollar might be worth 109 Yen.

The Bottom Line

The U.S. Dollar Index (USDX) compares the value of the U.S. dollar to that of a group of six other currencies (the Euro, the British Pound, the Japanese Yen, the Canadian Dollar, the Swedish Krona, and the Swiss Franc) seen as representative of global financial markets. Even though the index was first developed back in 1973, it continues to serve a valuable purpose today. Traders can use the USDX to speculate on the dollar's value or to hedge against currency exposure elsewhere, and it is also useful as a proxy for the state of the U.S. economy. Must Read : U.S. Dollar Index: What It Is and Its Recent History by Kimberly Amadeo  

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