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Term of the Day - User Dollar Index (DXY

US Dollar Index (DXY) - is a measure of the value of the U.S. dollar relative to a basket of foreign currencies. The DXY was established by the U.S. Federal Reserve in 1973 after the dissolution of the Bretton Woods Agreement. It is now maintained by ICE Data Indices, a subsidiary of the Intercontinental Exchange (ICE). The six currencies included in the DXY are often referred to as America's most significant trading partners. The index has only been updated once, in 1999, when the newly-created euro replaced the German mark, French franc, Italian lira, Dutch guilder, and Belgian franc. Consequently, the index does not fully reflect present-day U.S. trade.

The USDX can provide investors and consumers with insight into the relative strength of the dollar and how it might affect prices for goods and services as well as demand for imports and exports. It can also shed light on reasons for the state of the economy.

The U.S. dollar index is currently calculated by factoring in the exchange rates of six foreign currencies, which include the euro (EUR), Japanese yen (JPY), Canadian dollar (CAD), British pound (GBP), Swedish krona (SEK), and Swiss franc (CHF).

The euro is, by far, the largest component of the index, making up 57.6% of the basket. The weights of the rest of the currencies in the index are JPY (13.6%), GBP (11.9%), CAD (9.1%), SEK (4.2%), and CHF (3.6%).2

The index has risen and fallen sharply over time. It reached an all-time high in 1984 at nearly 165, and an all-time low of around 70 in 2007. In the years since then, the U.S. dollar index has been relatively range bound, fluctuating between 90 and 110. As of October 2024, USDX is trading around 102.3

The index is affected by macroeconomic factors, including inflation/deflation in the dollar and foreign currencies in the basket, as well as recessions and economic growth in those countries.

The index began in 1973 with a base of 100, and all subsequent values are relative to this base. It was established shortly after the Bretton Woods Agreement was dissolved.

As part of the agreement, participating countries settled their balances in U.S. dollars (which was established as the reserve currency), while the USD was fully convertible to gold at a rate of $35/ounce.

An overvaluation of the USD led to concerns over exchange rates and their link to the way in which gold was priced. President Richard Nixon decided to temporarily suspend the gold standard.

At that point, other countries were able to choose any exchange agreement other than the price of gold. In 1973, many foreign governments chose to let their currency rates float, putting an end to the agreement.