Dollar Index Explained

The U.S. Dollar index is a geometrically average of six currencies weighted against the U.S. dollar. It was created by the Federal Reserve in 1973 and the ICE USDX index is the trading vehicle for it. The index contains six currencies: the euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc. The euro replaced now-defunct five European currencies – the Deutsch Mark, the French franc, the Italian lira, the Dutch guilder and the Belgian franc.

Percentage Weights:

Currency Weight
Euro (EUR) 0.576
Japanese Yen (JPY) 0.136
British Pound (GBP) 0.119
Canadian Pound (CAD) 0.091
Swedish Krona (SEK) 0.042
Swiss Franc (CHF) 0.036

Before the euro the weightings of five historical currencies were: Deutsch Mark (DEM) = 20.8%; French franc (FRF) = 13.1%; Italian lira (ITL) = 9.0%; Dutch guilder (NLG) = 8.3%; and Belgium franc (BEF) = 6.4%

The formula:

U.S. DX = (50.14348112) X (EUR/USD)-0.576 X (USD/JPY)0.136 X (GBP/USD)-0.119 X (USD/CAD)0.091 X (USD/SEK)0.042 X (USD/CHF)0.036

In the formula the value of the ‘power’ is positive if the U.S. dollar is the base currency within the pair (JPY, CAD, SEK, and CHF) and the value is negative when it is not (EUR and GBP).

The value of the Dollar index is calculated by Reuters in real time approximately every 15 seconds from a multi-contributor feed of the spot prices.

Note:

The Federal Reserve’s Real Trade Weighted U.S. Dollar Index changes annually to reflect prior year’s development. It was introduce in 1998 primarily to keep pace with new developments in US trade. Its basket of currencies include more than 25 currencies from developed and developing nations. The index is computed as a geometric mean of the bilateral exchange rates of the included currencies. According to InterContinental Exchange, its USDX index matches closely with trade weighted US dollar index.

Source: The ICE U.S. Dollar Index.

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