In-Depth Analysis of the US Dollar Index Trend: A Must-Know Exchange Rate Thermometer for Global Investors

What Exactly Is the US Dollar Index Measuring?

In the international financial markets, a commonly discussed yet easily misunderstood concept is the performance of the US dollar relative strength. Similar to how the S&P 500 and Dow Jones Industrial Average track stock market performance, the dollar also has a dedicated “measurement tool.”

The US Dollar Index (USDX or DXY) primarily functions to dynamically reflect the overall performance change of the dollar against a basket of international currencies. This “basket” includes six of the world’s most liquid currencies:

• Euro (EUR): 57.6%, the largest component by weight
• Japanese Yen (JPY): 13.6%
• British Pound (GBP): 11.9%
• Canadian Dollar (CAD): 9.1%
• Swedish Krona (SEK): 4.2%
• Swiss Franc (CHF): 3.6%

You can think of the US Dollar Index as a “barometer of the global financial market.” When this index fluctuates, it often triggers chain reactions involving cross-border investments, commodity pricing, and even central bank policies of various countries.

The Deeper Meaning Behind the US Dollar Index Trends

Market Performance During a Strong Dollar Period

When the US dollar index continues to rise, it indicates that the dollar is appreciating against other major currencies. What chain reactions might this trigger?

From a global perspective, a stronger dollar makes dollar-priced commodities (like crude oil, gold, bulk agricultural products) relatively cheaper. But this “cheapness” is an illusion—because purchasing power shifts. Countries and companies holding other currencies will find import costs rising and the burden of repaying dollar-denominated debt increasing.

For export-oriented economies like Taiwan, a rising dollar often presents challenges. When international buyers settle in dollars, the converted NT$ transaction prices decline, directly impacting export companies’ earnings. Meanwhile, global hot money may flow into US financial assets, potentially causing capital outflows from the local market.

Investment Opportunities During a Weak Dollar Period

Conversely, when the US dollar index declines, it signifies a temporary weakening of the dollar’s appeal in the international market. Investors start reassessing the value of other assets, and capital may flow into emerging markets, Asian stocks, and even crypto assets.

This phase brings clear benefits to Taiwan:

• International hot money flows back into Asia, supporting the Taiwan stock market
• Expectations for the New Taiwan Dollar to appreciate increase, lowering import prices
• Export competitiveness improves

However, investors holding dollar assets will face exchange losses during this period. For example, converting 1 million USD back to NT$ during a dollar depreciation will yield less than initially expected.

The Calculation Logic of the US Dollar Index

The US Dollar Index is calculated using a geometric weighted average method, involving the formula:

$$\text{US Dollar Index} = 50.14348112 \times \prod_{i=1}^{6} \left(\frac{\text{Exchange Rate}_i}{\text{Base Period Exchange Rate}_i}\right)^{w_i}$$

Here, “50.14348112” is a fixed constant to ensure the starting value in 1985 is 100. The exchange rates of each currency pair are weighted according to their economic significance, with the euro assigned the highest weight due to representing the economies of 19 EU countries.

Understanding this formula is key: the US Dollar Index is not an absolute price but a relative change indicator.

• Index = 100: indicates parity with the base period
• Index = 76: indicates a 24% decline compared to the base period
• Index = 176: indicates a 76% increase compared to the base period

Therefore, analyzing the USD index over the past decade reveals oscillations mostly between 75 and 105, reflecting multiple adjustments in the global economic landscape.

Ten Years of US Dollar Index Trends: Key Turning Points

Over the past decade, the US dollar index has experienced three major phases:

2014-2016 Uptrend: The Federal Reserve began a rate hike cycle, causing the dollar to rise rapidly from lows to a high of 103.

2017-2019 Adjustment Period: Expectations of synchronized global economic recovery increased, and the dollar index fluctuated between 95-97.

2020 Pandemic Shock: The index surged briefly to 103, then quickly fell back to around 92 due to US monetary easing policies.

2021-2022 Resurgence: The Russia-Ukraine conflict, soaring global inflation, and aggressive Fed rate hikes pushed the dollar index to challenge the 110 high again.

This long-term trend reflects the complex interplay of global economic policies, geopolitical events, and market sentiment.

How the US Dollar Index Affects Various Asset Classes

The Inverse Relationship with Gold

Gold, priced in dollars, naturally exhibits a “see-saw” effect with the dollar. When the dollar appreciates, the same dollar amount buys less gold, reducing demand; when the dollar depreciates, gold becomes relatively cheaper and more attractive.

However, factors like inflation expectations, geopolitical tensions, and real interest rates also influence gold prices independently. Therefore, blindly betting on an inverse correlation between the dollar index and gold is unwise.

Complex Interactions with US Stocks

The relationship between the dollar and US stocks is neither simply positive nor negative but depends on the context:

When the dollar appreciates due to strong US economic fundamentals, corporate earnings prospects tend to be good, and US stocks often rise in tandem. But if the dollar rises because of economic downturns or market risk aversion abroad, US export competitiveness may weaken, dragging down stock performance.

The Linkage with Taiwan Stocks and the New Taiwan Dollar

During periods of declining US dollar index, global investors tend to reduce dollar holdings and increase exposure to Asian stocks. Taiwan’s tech-heavy stock market often benefits from this capital inflow. Simultaneously, expectations for the New Taiwan Dollar to appreciate strengthen, further attracting capital.

Conversely, during dollar appreciation phases, capital flows back to the US, putting pressure on Taiwan stocks.

Core Factors Driving Changes in the US Dollar Index

Federal Reserve Policies Are the Primary Drivers

Whether raising or cutting interest rates, Fed decisions directly influence global demand for dollar assets. Rate hikes increase yields on dollar deposits and US Treasuries; rate cuts do the opposite. Market expectations about future rates often have a more significant impact than actual policy announcements.

Ongoing Economic Data Signals

US economic indicators such as employment reports, CPI, and GDP continuously revise market outlooks. Strong data reinforce dollar appreciation expectations, while weak data prompt capital to seek alternative currencies.

Geopolitical Events and Safe-Haven Flows

Wars, political crises, natural disasters, and other black swan events reaffirm the dollar’s status as the ultimate safe-haven asset. During turbulent times, the dollar often appreciates counterintuitively to fundamentals, reflecting extreme market sentiment.

Movements in Other Major Currencies

Since the USD index is a relative measure, even if the dollar itself remains unchanged, a decline in the euro due to European recession will cause the dollar index to rise passively. This “crab walking” phenomenon is common in real markets.

Difference Between the US Dollar Index and the Trade-Weighted US Dollar Index

Investors often confuse these two terms. The US Dollar Index (DXY) is a traditional indicator compiled by ICE, based on six major currencies. The Federal Reserve more frequently references the Trade-Weighted US Dollar Index.

The latter includes over 20 currencies, weighted according to the actual US trade volume, covering currencies like the Chinese yuan, Korean won, Thai baht, NT$, and Mexican peso.

This distinction is crucial because the DXY emphasizes European currencies (over half of its weight), which may not accurately reflect the US’s trade competitiveness in Asia and emerging markets. The trade-weighted index better aligns with the current global economic landscape.

For most investors, the DXY suffices to grasp the overall trend. But for in-depth analysis of Fed policy or professional forex trading, the trade-weighted index offers a more comprehensive perspective.

Practical Summary

The rise or fall of the US Dollar Index is not just a technical fluctuation but reflects the overall direction of global capital flows, central bank policies, and market risk appetite.

Understanding the decade-long history of the USD index helps investors see why certain years see simultaneous prosperity in US stocks and emerging markets, while others show a seesaw pattern; why gold sometimes surges and other times falls into a bear market.

For those involved in forex trading, cross-border asset allocation, or concerned about exchange rate risks, developing a habit of monitoring the US Dollar Index is essential for making informed investment decisions. Regardless of market changes, this “global financial thermometer” always warrants a glance.