What is the US Dollar Index and how can you trade it?

A headshot of Patrick Foot, financial writer for FOREX.com and CityIndex
By :  ,  Financial Writer

The US dollar index is a live measure of the performance of the US dollar against a basket of other currencies. It’s a popular way to track the value of the world’s most-traded currency and a key market in its own right.

Learn how the dollar index works – and how you can trade it with a City Index account – here.

What is DXY?

DXY is the symbol for the US dollar index, which tracks the price of the US dollar against six foreign currencies, aiming to give an indication of the value of USD in global markets. The index rises when USD gains strength against the other currencies and falls when the dollar weakens.

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You’ll often see the index referred to as DXY, USDX or the ‘Dixie’ among forex traders.

How does the dollar index work?

The dollar index works by comparing the price of the US dollar against six other currencies: the euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc. These currencies were chosen when the index was formed back in 1974.

 

Since then, there has only been one change to the currencies in the index:  in 1999, when the euro replaced a suite of European currencies. These included the Deutsche mark, French franc, Italian lira and more.

Today, many of the United States’ key trading partners are missing from the USDX, which has singled out the index for criticism from some. Suggested amendments include replacing the Swiss franc and Swedish krona with the Chinese yuan and Mexican peso, bringing the basket of currencies more up to date. Alternatively, the USDX could expand to cover a wider set of currencies – including the yuan and peso.

The DXY started out with a base price of 100, with all subsequent prices relative to this base.

How to trade the DXY

To trade the DXY, you’ll need to open an account with a derivatives provider or a futures broker. Like other indices, there isn’t a physical underlying market to buy and sell, so you’ll need to use products like spread bets, CFDs or futures to take your position.

 

One poplar way to trade the dollar index is as a hedge against moves in the US dollar. If you’re worried that a rising USD could negatively impact your stock portfolio, for example, you might buy the DXY to compensate. Then, any losses from your stocks might be counteracted by gains from your dollar index position.

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Trading DXY with City Index

With City Index, you can trade the dollar index with CFDs or spread bets. Follow these steps to get started today:

  1. Open your City Index account
  2. Add some funds so you can start trading instantly
  3. Search for ‘US dollar index’ in the web platform or mobile app
  4. Hit ‘buy’ to take a long position, or ‘sell’ to go short

Not ready to trade with real funds? Open your City Index demo account, which comes with virtual capital you can use to trade DXY alongside 1,000s of other live markets.

How to calculate the dollar index

To calculate the dollar index, you multiply the exchange rate of each currency in the basket by its weighting. The weightings ensure that important currencies – such as the euro – affect the Dixie’s price more than lesser markets like the krona.

 

Today, the weightings used to calculate the dollar index are:

  • EUR/USD - 57.6%
  • USD/JPY - 13.6%
  • GBP/USD - 11.9%
  • USD/CAD - 9.1%
  • USD/SEK - 4.2%
  • USD/CHF - 3.6%

As you can see, Eurodollar is by far the biggest pair represented on the DXY, with a larger weighting than the other currencies added together. This reflects the fact that it replaced several different European currencies, plus the European Union’s status as a key trading partner of the US.

The formula to calculate the DXY is as follows:

USDX = 50.14348112 × EUR/USD -0.576 × USD/JPY 0.136 × GBP/USD -0.119 × USD/CAD 0.091 × USD/SEK 0.042 × USD/CHF 0.036

Notice how each of the weightings is multiplied as a negative, except USD/JPY and USD/CHF? That’s because those pairs have USD as the base, instead of the quote.

 

US dollar index history

The USDX launched in 1973, after the end of the Bretton Woods Agreement. The central bank agreement smoothed monetary policy relations between independent states and established commercial and financial ties between the United States, Canada, Western European countries and Australia.

Shortly after the end of Bretton Woods came the end of the gold standard, which had tied the value of USD directly to the precious metal. The dollar index provided a method for markets to establish the value of the world's reserve currency.

The Intercontinental Exchange (ICE) has managed the index since 1985.

US dollar index highs and lows

The USDX has traded in a wide range during its history, and unlike other indices it hasn’t risen overall since its inception. In fact, it reached its record high back on 5 March 1985, when it peaked at 163.83.

The record low is much more recent, landing on April 22 2008 at the outset of the great financial crash. As the index began at 100, a quick glance will tell you whether the US dollar is stronger now than it was in 1974.

What moves the price of the US dollar index?

The price of the USDX is moved by macroeconomic events, data such as GDP, the economic health of each country and the monetary and fiscal policies of each central bank.

Another large influence on the US Dollar index’s price is safe haven inflows. The index can rise during periods of uncertainty if traders regard the US dollar as a value store amid global economic crises. The index can fall if risk-on sentiment dominates and investors sell off USD and move into riskier assets.

Related tags: DXY Forex USD Insights

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