What is the US Dollar Index & Why is it Important? (2024)

FAQs

What is the US Dollar Index & Why is it Important? ›

The USDX allows traders and investors to monitor the purchasing power of the U.S. dollar relative to the six currencies included in the index's basket. Investors also use the dollar index as a litmus test for U.S. economic performance, particularly when it comes to imports and exports.

What Does the Dollar Index Tell You? The dollar index tracks the relative value of the U.S. dollar against a basket of important world currencies. If the index is rising, it means that the dollar is strengthening against the basket - and vice-versa.

The US Dollar Index – known as USDX, DXY, DX and USD Index – is a measure of the value of the United States Dollar (USD) against a weighted basket of currencies used by US trade partners. The index will rise if the Dollar strengthens against these currencies and fall if it weakens.

The USD remains the world's reserve currency, providing relative stability and safety compared to other currencies. The dollar also supports global trade through its role in banking and its ease of use.

Interpreting and Trading the U.S. Dollar Index (DXY)?

Simply put, if the USDX goes up, that means the U.S. dollar is gaining strength or value when compared to the other currencies. Similarly, if the index is currently 80, falling 20 from its initial value, that implies that it has depreciated 20%.

A falling dollar diminishes its purchasing power internationally, and that eventually translates to the consumer level. For example, a weak dollar increases the cost to import oil, causing oil prices to rise. This means a dollar buys less gas and that pinches many consumers.

prices to changes in the dollar, most derived from data drawn largely from the 1970s, reinforce this impression Though estimates vary substantially, depending on the model and period of estimation (appendix), the con- sensus is that a 10 percent rise in the dollar's value will reduce the Consumer Price Index (CPI) ...

That is because when the dollar is strong, foreign sales will convert into fewer dollars and thereby lower profits, and that often leads to falling stock prices, and vice versa.

The Kuwaiti dinar continues to remain the highest currency in the world, owing to Kuwait's economic stability. The country's economy primarily relies on oil exports because it has one of the world's largest reserves.

Prior to 1971, the US dollar was backed by gold. Today, the dollar is backed by 2 things: the government's ability to generate revenues (via debt or taxes), and its authority to compel economic participants to transact in dollars.

What happens if the world stops using the U.S. dollar? ›

If the world stops using the dollar as its reserve currency, it could have a significant impact on the U.S. stock market. A shift away from the dollar could lead to a decline in demand for U.S. financial assets, including stocks. This could result in a decrease in stock prices and potentially lead to a bear market.

The highest-valued currency in the world is the Kuwaiti Dinar (KWD). Since it was first introduced in 1960, the Kuwaiti dinar has consistently ranked as the world's most valuable currency. Kuwait's economic stability, driven by its oil reserves and tax-free system, contributes to the high demand for its currency.

Even with de-dollarization, the U.S. dollar remains the world's currency reserve. The status is due primarily to the fact that countries accumulated so much of it and that it was still the most stable and liquid form of exchange.

The index was created to help traders understand how strong or weak the U.S. dollar is in relation to foreign currencies such as the Euro, Canadian Dollar, and Japanese Yen.

The U.S. Dollar Index (DXY) tracks the dollar's strength against the currencies of the U.S.' most significant trading partners. Traditionally, when the dollar has weakened, it has been an indicator that EM stocks have performed better relative to U.S. stocks.

The dollar and the S&P 500 have often had a negative correlation in the past three years, meaning that when the dollar rises, stocks fall. From April to October 2022, the dollar surged and the S&P 500 plummeted. It happened again from late July to late October of last year.

The Bottom Line

A strong dollar allows U.S. consumers to purchase goods and services from overseas for less than if the dollar was weaker. It also helps compensate for rising inflation by keeping purchasing power from dropping too much.

Stock indexes tend to rise along with an increase in the value of the U.S. dollar. More important to an investor is the impact of the dollar's rise or fall on the individual stocks they own. Companies that rely on imports thrive when the U.S. dollar is strong.

In terms of its impact, a strong dollar means that goods exported by the U.S. are relatively pricier for foreign customers to buy, while imports to the U.S. are relatively cheap. A weak dollar means American consumers must spend more dollars to buy the same imported goods but are a relative bargain abroad.

Typically, commodity prices are inversely related to the value of the dollar, meaning that prices drop when the dollar strengthens against other major currencies. Conversely, prices generally move up when the value of the dollar weakens.