The US Dollar Index is a Joke

Why is it called U.S. Dollar Index?

I don’t know why it is called the USD index but the name is a joke. It is only composed of 6 currencies (see below) and the EUR makes up 57.6% If you add in the CHF, which generally moves in the same direction as the EUR vs the USD, then this bloc makes up over 60% of the index. If you include the Swedish krona in this bloc, the percentage rises to 65.4.\

USDX (CFD) Chart

Source: The Amazing Trader

Investopedia defines the U.S. Dollar Index – USDX as follows:

A measure of the value of the U.S. dollar relative to majority of its most significant trading partners. This index is similar to other trade-weighted indexes, which also use the exchange rates from the same major currencies.

According to Wikipedia,

The US Dollar Index (USDX) is an index (or measure) of the value of the United States dollar relative to a basket of foreign currencies.^[1]

It is a weighted geometric mean of the dollar’s value compared only with “basket” of 6 other major currencies which are:

• Euro (EUR), 57.6% weight
• Japanese yen (JPY) 13.6% weight
• Pound sterling (GBP), 11.9% weight
• Canadian dollar (CAD), 9.1% weight
• Swedish krona (SEK), 4.2% weight
• Swiss franc (CHF) 3.6% weight

^[2]
USDX goes up when the US dollar gains “strength” (value) when compared to other currencies.^[3]

USDX started in March 1973, soon after the dismantling of the Bretton Woods system. At its start, the value of the US Dollar Index was 100.000. It has since traded as high as 164.7200 in February 1985, and as low as 70.698 on March 16, 2008.

The makeup of the “basket” has been altered only once, when several European currencies were subsumed by the Euro at the start of 1999.

Given globalization and the mix of US trade, this cannot be called a trade weighted index. It still exists because it has a history that dates back over 40 years but it is more of a USD vs. EUR index than a USD index. So when you see the USD index go up or down, it is the EUR that is mainly driving it.

Why not call it the EURUSD index? The point is the index does not tell you if the dollar is trading weak or strong. It tells you how the EURUSD is trading.

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