US Dollar Index

The US dollar index is a measure of the value of the United States dollar, used by traders, investors, and economists. In this guide, we explain its composition today, calculation, trading economics, and historical performance. We also explain how to trade the US dollar index with a list of the top brokers and platforms in 2024.

What Does The US Dollar Index Represent?

The US dollar index is a live measure of the US dollar relative to a basket of other major currencies, including the British pound, euro, Japanese yen, Canadian dollar, Swedish krona, and Swiss franc.

The index is computed using a weighted average of exchange rates between the US dollar and these other currencies.

It was first introduced in 1973 by the New York Board of Trade and measures the strength or weakness of the US dollar in global currency markets.

The US dollar index is also sometimes referred to as USDX or DXY, which is its ticker symbol on trading platforms.

How Does The US Dollar Index Work?

The US dollar index is calculated using a weighted geometric mean of the exchange rates between the US dollar and six major currencies. The weightings are based on the relative importance of each currency in US trade.

The index measures the value of the US dollar against a basket of currencies, rather than against any single currency because it’s a more accurate and stable measure of the currency’s value. This means fluctuations in the value of one currency may be offset by movements in the other currencies in the basket. This helps to reduce the impact of volatility in any one currency on the overall value of the index.

To calculate the US dollar index, each currency’s exchange rate is first converted into an equivalent percentage value relative to the US dollar. For example, if the exchange rate for the euro is 1.2 dollars, the percentage value would be 83.33 (1 divided by 1.2, multiplied by 100). These percentage values are then multiplied by their respective weightings, and the resulting values are summed up to create the index value.

The US dollar index is calculated in real-time throughout the trading day and is widely used by traders, investors, and policymakers to monitor the strength of the US dollar. A higher index value indicates that the US dollar is stronger relative to the basket of currencies, while a lower one indicates it’s weaker.

Note, brokers may have their own components and respective weightings in the US dollar index, such as CMC Markets below. These will be detailed in the product specifications.

CMC Markets US Dollar Index Components

Background Explained

The US dollar index dates back to 1973 when the US government officially ended the gold standard and allowed the US dollar to float freely. Before this, there was a fixed relationship between the US dollar index and the price of gold.

The New York Board of Trade (now part of the Intercontinental Exchange) introduced the US dollar index in March 1973 and it was set at a base level of 100, calculated using the currencies of the US’s major trading partners at the time.

The composition of the spot index has changed to reflect shifts in global trade patterns. In 1999, the euro was added as a component currency, and in 2000, the Deutsche mark was replaced by the euro as Germany’s official currency. In 2018, the Chinese yuan was added to the index as a sixth currency.

The price of the US dollar index has fluctuated over its history, reflecting changes in global economic conditions and monetary policy. The index reached a peak of 164.72 in February 1985, due to high US interest rates and strong economic growth, and a low of 71.33 in March 2008, at the height of the global financial crisis.

Live Chart

What Moves The US Dollar Index?

• Interest rates: Higher interest rates generally lead to an increase in demand for US dollars. When interest rates in the US rise, it becomes more attractive for foreign investors to hold US dollar-denominated assets such as bonds, stocks, and real estate. The US dollar rises as a result.
• Inflation: Higher inflation can decrease demand for US dollars, as it reduces the purchasing power of the currency. In addition, high inflation rates can lead to concerns about the stability of the economy, which can cause investors to sell off US dollar-denominated assets and seek safer investments in other currencies. This can contribute to a decline in the value of the US dollar. Note, the best brokers show the US dollar index adjusted for inflation.
• Economic growth: Stronger economic growth in the US can lead to an increase in demand for US dollars, as investors seek to invest in growing markets. This increase in demand for US assets can lead to an increase in demand for US dollars, which can cause the value of the US dollar index to appreciate relative to other currencies.
• Geopolitical events: Political or economic instability in other parts of the world can lead to an increase in demand for US dollars as a safe haven currency. In times of geopolitical instability, investors often become more risk-averse and may look to shift their investments to safer assets, such as those denominated in US dollars. This increase in demand for US assets can lead to an increase in demand for US dollars, which can cause the value of the US dollar index to appreciate.
• Trade balances: A trade deficit can put downward pressure on the US dollar, as it suggests a greater supply of US dollars in global currency markets. As a result, the value of the US dollar index may decline.
• Central bank policy: Actions taken by the Federal Reserve, such as changes in interest rates or the implementation of quantitative easing, can have a significant impact on the value of the US dollar index.

Trading The US Dollar Index

The US dollar index can be traded through various vehicles at the top brokers, including CFDs, futures, options, and ETFs.

To start trading the US dollar index at online brokers:

1. Choose a broker: You will need to find a trading broker that allows you to trade the US dollar index. Among the most popular US dollar index brokers in the UK is Pepperstone, an FCA-regulated firm that offers average spreads of 6 pips on the USDX alongside 1:5 leverage.
2. Analyse market conditions: Before making a trade, analyse current market conditions and any factors that may impact the price of the US dollar index, such as tracking economic indicators, monitoring central bank policy, or assessing geopolitical events. The top US dollar index brokers offer interactive daily, weekly, monthly and long-term 20+ years charts with historical data and news streams that provide insights to help with forecasts and predictions today.
3. Place a trade: The top US dollar index brokers offer trading from charts and graphs on popular platforms like MetaTrader 4. Traders can set stop loss and take profit orders to limit their risk exposure.

Note, the US dollar index is not regulated in the same way as individual stocks or other securities. However, futures contracts that are used to trade the US dollar index are regulated by the Commodity Futures Trading Commission (CFTC) in the United States. The CFTC is responsible for regulating the futures and options markets, including setting rules designed to protect investors and maintain the integrity of the markets and its prices.

UK traders should also sign up with FCA-regulated brokers for additional peace of mind. This should mean sensible restrictions on retail leverage, negative balance protection, plus access to compensation should the brokerage go bankrupt.

Benefits Of US Dollar Index Trading

Pros of investing through US dollar index brokers include:

• Liquidity: The US dollar index is widely traded and highly liquid, meaning that it can be bought and sold quickly and easily, and at a relatively low cost.
• Transparency: The US dollar index is calculated and published in real-time, making it easy for investors to monitor and analyse market trends.
• Accessible: Trading the US dollar index can be done through various financial instruments, including CFDs, ETFs, futures, and options, making it accessible to a range of UK investors.
• Diversification: The US dollar index provides exposure to a basket of currencies, which can help diversify investment portfolios.
• Trading hours: Retail investors can speculate on the US dollar index throughout the standard week at the best brokers. CMC Markets, for example, offers US dollar index trading from 00:00 – 22:00 GMT, Monday to Friday. The USDX can also be traded through futures contracts on the Intercontinental Exchange (ICE) exchange. The trading hours for the US dollar index futures symbol on ICE are  Sunday: 6:00 PM ET to 5:00 PM ET Monday, Monday – Thursday: 6:00 PM ET to 5:00 PM ET the following day, Friday: 6:00 PM ET to 5:00 PM ET Sunday.

Risks Of US Dollar Index Trading

Cons of online trading at US dollar index brokers include:

• High volatility: The US dollar index can be highly volatile to economic or geopolitical events, leading to unexpected price movements.
• Technical analysis challenges: Using past market data to predict future price movements can be challenging with the US dollar index due to the complex nature of the basket of currencies it tracks.
• Economic factors: The US dollar index is heavily influenced by economic factors, such as interest rates and inflation, which can be difficult to predict and analyse accurately.
• Geopolitical risks: Political or geopolitical events impact the US dollar index, making it difficult to anticipate and respond to sudden changes in the market.
• Margin requirements: Trading the US dollar index through derivatives often require traders to post margin, which can increase the risk of large losses.

Bottom Line On The US Dollar Index

The US dollar index is widely followed and is often used as a benchmark for measuring the strength of the US dollar. Traders should consider their financial goals and risk tolerance before investing, and stay informed of economic and geopolitical events that could impact the value of the USDX.

See our list of top-rated US dollar index brokers to start trading.

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