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U.S. Dollar Index (USDX)

Table of Contents

The U.S. Dollar Index (USDX) is a measure of the value of the United States dollar relative to a basket of foreign currencies. It provides a weighted average of the dollar’s exchange rates against a select group of currencies, offering insight into the dollar’s overall strength or weakness. In this article, we’ll explore the concept of the U.S. Dollar Index, its calculation method, and its significance in global financial markets.

Definition of USDX

The U.S. Dollar Index is calculated using the following formula:

= ( 0 ) × 50.14348112 USDX = ( E0​E​ ) × 50.14348112

Where:

  • E represents the geometric mean of the dollar’s exchange rates against a basket of six major currencies: the euro (EUR), Japanese yen (JPY), British pound (GBP), Canadian dollar (CAD), Swedish krona (SEK), and Swiss franc (CHF).
  • 0E0​ represents the geometric mean of the dollar’s exchange rates in the base period (March 1973).
  • The constant 50.14348112 is used to normalize the index to a base value of 100 in the base period.

Calculation Method

The U.S. Dollar Index is calculated using exchange rate data provided by the Intercontinental Exchange (ICE), which updates the index value periodically throughout the trading day. The index is weighted based on the trade flows between the United States and its major trading partners, with each currency assigned a specific weight in the basket.

Significance in Global Financial Markets

The U.S. Dollar Index is significant in global financial markets for several reasons:

  1. Indicator of Dollar Strength or Weakness: The index provides a gauge of the dollar’s strength or weakness relative to a basket of major currencies. A rising USDX value indicates a strengthening dollar, while a declining value suggests a weakening dollar.
  2. Impact on Global Trade and Investment: Changes in the value of the U.S. Dollar Index can have significant implications for global trade and investment flows. A stronger dollar may make U.S. exports more expensive for foreign buyers but can make imports cheaper for U.S. consumers and businesses.
  3. Hedging and Risk Management: Market participants, including multinational corporations, institutional investors, and central banks, use the U.S. Dollar Index to hedge currency risk and manage their exposure to fluctuations in the dollar’s value. Futures and options contracts based on the USDX are traded on various exchanges worldwide.
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