US Dollar Index Trend Analysis: A Must-Know Course on Global Capital Flows

When mentioning the US dollar, you might think of cash, but in the global financial markets, the most important data is actually the “US Dollar Index.” It is not just an indicator that economists pay attention to, but also an invisible driver that determines your investment returns.

What exactly does the US Dollar Index measure?

Imagine the US Dollar Index as a global economic thermometer. Stock markets have indices like the S&P 500 and Dow Jones to track stock performance. Similarly, the US Dollar Index (USDX or DXY) is used to measure the strength of the dollar relative to other currencies.

Specifically, it tracks the exchange rate movements of the dollar against six major international currencies:

Since the US dollar is the most mainstream trading currency worldwide, from crude oil and gold to international investments, most are priced in dollars. Therefore, any movement in the US Dollar Index can influence the entire financial market.

What does the movement of the US Dollar Index mean?

When the US Dollar Index rises

When the US Dollar Index increases, it indicates that the dollar is appreciating relative to other currencies, in economic terms, “Dollar Strengthening.” What phenomena might occur?

Benefits to the US economy:

• Imported goods become cheaper, boosting US consumers’ purchasing power
• Global capital flows into US assets (US Treasuries, US stocks)
• Helps curb inflation and eases inflationary pressures

Impact on export-oriented economies:

• For example, in Taiwan, goods become relatively more expensive on the international market, reducing competitiveness
• Emerging markets with dollar-denominated debt face increased repayment pressure
• Exchange loss risks increase

When the US Dollar Index falls

A decline in the US Dollar Index means the dollar is depreciating relative to other currencies, and the market’s attraction to dollar assets diminishes. Capital may flow to other regions:

Positive for emerging markets:

• Hot money flows into Asian stock markets, providing support to Taiwan stocks
• Local currencies appreciate, reducing import costs
• Export companies become more competitive

Risks to watch:

• If you hold dollar assets (US stocks, dollar deposits), currency conversion may result in losses
• Dollar depreciation means reduced purchasing power

How is the US Dollar Index calculated? Core formula revealed

The US Dollar Index uses a “geometric weighted average” calculation, involving the weights of each currency and exchange rates. Simply put:

• Index value = 100: indicates parity with the base period (1985)
• Index value > 100: dollar has appreciated, e.g., 125 indicates a 25% increase since base
• Index value < 100: dollar has depreciated, e.g., 90 indicates a 10% decline

The key point is, the US Dollar Index is not an absolute exchange rate but a relative measure, reflecting the overall position of the dollar in the international market.

Interaction between the US Dollar Index and global assets

Relationship with US stocks

The correlation between the dollar and US stocks is not one-way:

• Sometimes, dollar appreciation can boost US stocks (capital inflow into US markets)
• But if the dollar rises too sharply, it can hurt US export profits, dragging down the stock market
• In early 2020, during the pandemic, the dollar surged to 103, then rapidly declined with the Federal Reserve’s easing policies

Conclusion: It depends on the economic context and policy direction at the time, not just a single indicator.

Inverse relationship with gold

Gold and the dollar usually show a “see-saw” relationship:

• Dollar strengthening → Gold prices fall (cost of buying gold increases)
• Dollar weakening → Gold prices rise (purchasing power declines, funds shift to safe assets)

However, gold is also influenced by war, inflation, oil prices, and other factors.

Correlation with Taiwan stocks and New Taiwan Dollar

General patterns:

• US Dollar Index rising → capital flows back to the US → New Taiwan Dollar under pressure, Taiwan stocks face selling pressure
• US Dollar Index falling → capital flows into Asia → New Taiwan Dollar appreciates, Taiwan stocks profit

But these are not ironclad rules. When market sentiment is good, global stocks and currencies may rise together; during black swan events, assets may all plunge simultaneously.

What factors drive the movement of the US Dollar Index?

Federal Reserve interest rate policies

This is the most direct influence:

• Rate hikes → US dollar interest attractiveness increases → global capital inflows → US dollar strengthens
• Rate cuts → US dollar attractiveness decreases → capital outflows → US dollar weakens

Every Federal Reserve meeting decision can trigger market volatility.

US economic data

Employment reports, CPI inflation data, GDP growth rates are key:

• Strong data → Confidence in the dollar increases → Index rises
• Weak data → Market confidence drops → Dollar faces downward pressure

Geopolitical and international events

Wars, political turmoil, regional conflicts trigger global risk aversion, with the dollar often being the first choice as a safe haven asset. Sometimes, “the more chaotic, the stronger the dollar” is the reason.

Performance of other major currencies

Since the US Dollar Index is a relative measure, when the euro, yen, or other currencies weaken due to economic weakness or loose policies in their respective countries, the index can appear higher even if the dollar itself isn’t particularly strong.

US Dollar Index vs Trade-Weighted US Dollar Index: Which is more important?

There are two common measures of the dollar in the market, and investors often confuse them:

US Dollar Index (DXY):

• Compiled by ICE (Intercontinental Exchange), the version most cited by media
• Covers only 6 currencies, mainly the euro (57.6%)
• Suitable for quick understanding of market sentiment

Trade-Weighted US Dollar Index:

• Official indicator mainly referenced by the Federal Reserve
• Includes over 20 currencies, such as RMB, Korean won, Taiwan dollar, Thai baht, etc.
• Reflects more accurately the actual exchange rate changes with US trading partners

Practical advice: If you’re a general investor, looking at the US Dollar Index is sufficient. But if you’re researching Fed policies or engaging in forex trading, the trade-weighted index offers a more comprehensive perspective.

Mastering the US Dollar Index trend to optimize investment decisions

The US Dollar Index trend is a crucial bridge connecting the global economy and individual investments. It influences nearly all dollar-denominated assets like gold, crude oil, and stocks.

In forex trading, the US Dollar Index is an essential indicator. Whether or not your portfolio includes forex positions, understanding the logic behind dollar index fluctuations can help you make smarter decisions in the financial markets. Regularly tracking Fed policies, US economic data, and global events will enable you to forecast the dollar index trend and adjust your risk positions accordingly.