US Dollar Index

The US Dollar Index (USDX) is a financial instrument that measures the value of the US dollar against a basket of six major currencies: the euro, the Japanese yen, the British pound, the Canadian dollar, the Swedish krona, and the Swiss franc. Among the above 6 foreign currencies, the value of the USD Index is heavily influenced by the Euro (about 57.6%). The remaining 5 currencies are as follows: British pound GBP (11.90%), Japanese yen JPY (13.60%), Swedish krona SEK (4.20%), Canadian dollar CAD (9.10%), and franc Switzerland CHF(3.60%).

The USDX was created in 1973 by the US Federal Reserve after the end of the Bretton Woods system and is now maintained by ICE Data Indices, a subsidiary of the Intercontinental Exchange (ICE). After the collapse of the Bretton Woods system (fixing the USD at the rate of 35 USD/1 ounce of gold), the US and other countries needed to unify policies to regulate currency exchange rates. As a result, many governments have chosen a policy of floating exchange rates. Soon after, the U.S. Dollar Index was developed to track the strength of the USD when countries implement floating exchange rate policies. At the time of launch, the Dollar Index had a value of 100.

The USDX is widely used as a benchmark for the strength of the US dollar and its impact on the global economy. For any country, when the Dollar Index tends to increase, there is a high possibility that that country's currency will depreciate compared to the USD. Therefore, it will directly impact international trade because the US is the world's largest economy. Besides, exchange rate fluctuations also affect many other macro factors such as inflation, GDP growth, monetary policy, and investment cash flow.