The US dollar index is used to measure the relative strength or value of the United States dollar (USD) against six major foreign currencies used by US trade partners.
US dollar index is one of the most popular currency indexes followed worldwide.
USD is known as the world’s reserve currency.
Currencies of six major US trade partners are the Euro (EUR), Japanese Yen (JPY), Pound Sterling (GBP), Canadian Dollar (CAD), Swedish Krona (SEK) and Swiss Franc (CHF).
EURO and Japanese Yen have more weight on the dollar index followed by British Pound.
The Chinese yuan (CNY) is not in the US Dollar index even though China is a major trading partner of the US.
How to track the US Dollar Index?
If the US dollar index (DXY) rises, then USD strengthens against the above six currencies. If the US dollar index is falling, then it means that the US dollar is weakening against these currencies.
The US Dollar index is maintained and published by Intercontinental Exchange Inc (ICE).
You can track performance of the US Dollar index on Investing.com site with code DXY.
Why should you track the US Dollar Index (DXY)?
Rise and fall of the US dollar index will indicate the strength and weakness of USD against six major currencies. It will help traders to predict the market which is linked to USD such as commodities priced in USD and currency pairs that include USD.
When the USD is strong, it means export out of the US will be less competitive internationally. It will become more competitive when USD is weaker.
As in the case of any security, the US Dollar Index is affected by the concept of supply and demand for the USD and other six major currencies that make up the basket.
Supply and demand is influenced by the central bank’s monetary policies such as interest rates. Inflation, economic performance of the US and other six countries, and market sentiment also impacts the performance of the US dollar index (DXY).
Impact of strong USD on US economy
If USD is strengthening against foreign currencies then USD can buy more foreign currencies than before.
It means 1$ can now buy more from foreign countries.
It will help US consumers to get cheaper imported goods and less expensive foreign travels.
However, it impacts the United State’s exports as US made products will be more costlier in foreign markets than before.
Here is a table showing strong US dollar advantages and disadvantages.
| Advantaged | Disadvantages |
| Traveling abroad becomes cheaper for US citizens as a strong USD can buy more goods when converted to the local currency. | Tourism to the U.S. will decrease as the USA will become more expensive for foreigners traveling to the USA. |
| Goods produced abroad and imported to the US will be cheaper. | US domestic goods having foreign markets will have a high impact as they will become less competitive due to high cost. |
| Raw materials from abroad will have a lower total cost of production. | US exporters will be paid less which will impact their income statement |
Therefore, a strong USD is good for many and not so good for others.
Impacts of US Dollar Index on India
Indian Rupee (INR) is not a part of the US Dollar Index. Even then, strength and weakness in the US Dollar Index can impact the Indian market.
When the US dollar index weakens, the overall USD weakens against almost all major currencies including INR.
If USD depreciate and INR appreciate, then US investors see it an opportunity for higher returns in India. They will start investing in the Indian Market for higher return.
Due to heavy buying from Foreign Institutional Investment (FII) the overall market will turn bullish. On the contrary, when INR depreciates against USD, the market may turn bearish due to selling pressure of FII.
The US Dollar index has an impact on crude oil, natural gas and other commodities as well. China and India are the largest crude oil importers. With the rise in US dollar index, the crude price and related commodities become more expensive in India. Due to this increase, our import cost goes up and it widens our current account deficit.
Due to the higher cost of crude oil, all other expenses which are directly related to oil go up, which leads to inflation.
If the selling price of petrol and diesel is not adjusted with the rise of cost price, then the difference affects the profitability of the oil importers and refineries in India. Due to this reason, you may find selling pressure in oil stocks.
It also impacts profitability of those companies which have borrowed Dollar denominated debt as they have to pay more towards repayment of debt.
Frequently Asked Questions – FAQs
What is the ticker for the US dollar index?
The ticker to track the US dollar index is “DXY”. You can use “DXY” in investing.com and trading view charts to have a look on how it performs.
Is a high US Dollar Index good?
High US Dollar index means USD is strong in comparison to other six major foreign currencies. A strong USD is good for the US import market, but not good for the US export market.
A strong USD means consumers in the USA will benefit from less costly imported goods and can have less expensive foreign travel.
What causes the US dollar index to rise?
US Dollar index can rise due to many factors. Major factors are USD reserve status, inflation, political stability, interest rates, trade deficit/surplus and public debt.
Disclaimer: In addition to the disclaimer below, please note, this article is not intended to provide investing or trading advice. Trading in the stock market and in other securities entails varying degrees of risk, and can result in loss of capital. Most investors and traders lose money. Readers seeking to engage in trading and/or investing should seek out extensive education on the topic and help of professionals.
