What is DXY? Understanding the US dollar index in the foreign exchange market

The Importance of the Dollar Index in Forex Trading

In the foreign exchange trading sector, the role of the USD strength index (USD Index or DXY) cannot be overlooked. This is an analytical tool that professional traders always monitor to make accurate trading decisions. When the USD Index rises, it reflects that the US dollar is appreciating against other major currencies worldwide. Conversely, a decline in DXY indicates that the USD is weakening in the global market.

What is the DXY Index?

US Dollar Strength Index (USD Index, USDX, DXY) is a quantitative measure of the value of the US dollar compared to a basket of major currencies from countries that are significant trading partners of the United States. The structure of this currency basket includes:

• EUR: 57.6%
• JPY: 13.6%
• GBP: 11.9%
• CAD: 9.1%
• SEK: 4.2%
• CHF: 3.6%

This index is designed, managed, and published by ICE (Intercontinental Exchange, Inc.), and is known as the “US Dollar Index.” It reflects the weighted change in the value of the dollar relative to the currencies in the basket.

History of DXY Formation

The DXY index was launched in 1973 with a base level set at 100. Since then, all index values are referenced to this base level. The highest recorded value was 164.72 in February 1985, while the lowest touched 70.698 in March 2008. The creation of this index is related to President Nixon’s decision to abolish the gold standard, allowing the dollar to be freely valued on the foreign exchange market. Before 1973, under the Bretton Woods agreement (1944), the dollar was valued at $35 per ounce of gold.

The Correlation Between DXY and Currency Pairs

DXY and EUR/USD

There is a clear inverse correlation between the dollar index and the EUR/USD exchange rate. When the USD Index rises, it means the dollar is strengthening, so investors buy USD and sell EUR. As a result, the EUR/USD rate tends to decrease. Similarly, when DXY falls, EUR/USD tends to increase.

DXY and USD/JPY

Contrary to EUR/USD, the correlation between DXY and USD/JPY is positive. When the USD Index increases, it reflects dollar strength, and the USD/JPY rate also tends to rise. This relationship helps traders forecast the movement of currency pairs based on USD Index fluctuations.

DXY and the Gold Market

Gold and the dollar index also have an inverse correlation. When the dollar weakens (DXY decreases), investors tend to shift towards gold, causing gold prices (XAU/USD) to rise. Conversely, when DXY strengthens, investors may sell gold to buy USD, leading to a decline in gold prices.

How to Calculate the DXY Index

The USDX is calculated using the following formula:

USDX = 50.14348112 × EURUSD⁻⁰’⁵⁷⁶ × USDJPY⁰’¹³⁶ × GBPUSD⁻⁰’¹⁹ × USDCAD⁰’⁰⁹¹ × USDSEK⁰’⁰⁴² × USDCHF⁰’⁰³⁶

In this formula, EUR and GBP are considered as the quote currencies (cost to buy one unit of currency), hence the negative exponents. The other currencies are the base currencies (how many units of currency one dollar can buy), so they have positive exponents. However, in actual trading, you don’t need to memorize this formula—the trading software will automatically perform the calculations.

How to Read and Apply the DXY Index

Suppose on September 20th, the Dollar Index closes at 105. If the next day it rises to 108, it means the dollar has strengthened by 2.85% compared to the previous day. Conversely, if the index drops to 103, the dollar’s value has decreased by 0.97%.

To effectively use DXY in trading:

1. Follow the main trend: When DXY rises, buying USD is safer. When DXY falls, consider selling USD and exploring opportunities with other currencies.

2. Analyze currency pairs: Use the correlation between DXY and currency pairs to forecast movement directions, such as EUR/USD, USD/JPY, GBP/USD, AUD/USD.

3. Identify commodity trends: Analysts often use DXY to determine trends in commodity markets related to USD, such as gold, silver, and oil.

Related USD Indices

US Dollar Broad Index (

Besides the standard USDX, the Federal Reserve )FED( also publishes another index created in 1998 called the Broad Index. This index includes currencies from 26 countries and regions, with annual weight adjustments to reflect changes in US trade relationships. It provides a more comprehensive picture of the dollar’s strength compared to the traditional USDX.

) Differentiating Between USDX Index and USDX Digital Currency

It is important to note that the USDX ###US Dollar Index( is different from USDx, a digital currency developed by Lighthouse on the Blockchain platform. Due to similar symbols, confusion can occur. The USDX index is a traditional financial analysis tool, while USDx is a digital asset within the crypto ecosystem.

Currency Basket and Its Significance

The currency basket in the USD Index includes currencies from major US trading partners. EUR accounts for the largest share at nearly 58%, reflecting the significant role of the Eurozone in international trade. This structure is designed so that the DXY can accurately represent the real strength of the US dollar in the global market.

Conclusion

The USD Index )DXY( is an essential analytical tool that every Forex trader should master. By understanding how DXY works, its correlation with currency pairs and commodities, you will be better equipped to forecast market trends. Regularly monitoring this index’s fluctuations will help optimize your trading strategies and manage risks more effectively in your forex transactions.