The dollar index is a measure of the value of the U.S. dollar relative to a basket of six foreign currencies. These are: the euro, Japanese yen, Canadian dollar, British pound, Swedish krona, and Swiss franc. The index was established in 1973 after the end of the Bretton Woods system, which fixed the exchange rates of major currencies to the U.S. dollar. The index reflects the strength or weakness of the dollar against its trading partners’ currencies.
The dollar index is calculated by taking a weighted geometric mean of the exchange rates of the six currencies in the basket. The euro has the largest weight in the index, accounting for 57.6% of the basket. The weights of the other currencies are: yen (13.6%), pound (11.9%), Canadian dollar (9.1%), krona (4.2%), and franc (3.6%). The index has a base value of 100, which means that a value above 100 indicates that the dollar has appreciated against the basket, while a value below 100 means that the dollar has depreciated.
The dollar index is influenced by various factors, such as interest rates, inflation, trade balance, economic growth, political events, and market sentiment. Generally, a higher interest rate in the U.S. makes the dollar more attractive to investors, while a lower interest rate reduces its appeal. A higher inflation rate in the U.S. erodes the purchasing power of the dollar, while a lower inflation rate preserves it. A positive trade balance (or surplus) in the U.S. means that more foreign currency is flowing into the country than out, which boosts the demand for the dollar. A negative trade balance (or deficit) means that more foreign currency is flowing out than in, which reduces the demand for the dollar. A stronger economic growth in the U.S. increases the confidence in the dollar, while a weaker growth lowers it. Political events, such as elections, wars, or crises, can also affect the dollar index by creating uncertainty or risk aversion among investors. Market sentiment refers to the overall mood or attitude of investors towards the dollar and its prospects.
The dollar index fluctuates constantly as these factors change over time. For example, on December 15th 2021 at 03:10 ET (07:10 GMT), the dollar index traded 0.1% lower to 102.420, after climbing to 102.75 for the first time since April 10 earlier in the session . This means that on that day and time, the dollar lost some value against its basket of currencies, but it was still higher than its level in April 2021.
The dollar index is an important indicator for traders and investors who want to monitor the performance of the U.S. currency and its impact on other markets. For example, a rising dollar index can make U.S. exports more expensive and less competitive in foreign markets, which can hurt U.S. companies and economic growth. A falling dollar index can make U.S. imports cheaper and more affordable for domestic consumers, which can stimulate demand and inflation. The dollar index can also affect the prices of commodities that are denominated in U.S. dollars, such as oil and gold. A stronger dollar can make these commodities more expensive for foreign buyers, which can reduce their demand and lower their prices. A weaker dollar can make these commodities cheaper for foreign buyers, which can increase their demand and raise their prices.
The dollar index is a useful tool for understanding and analyzing the movements of the U.S. currency and its implications for global markets.
The article explains what is the dollar index and how it fluctuates against other currencies based on various factors.