The Truth Behind the Movement of the US Dollar Index (USDX): A Thermometer for Global Capital Flows

In the international financial markets, headlines like “Dollar Index Rises” frequently appear, yet they often leave investors puzzled. What exactly does the Dollar Index reflect? Why do its movements influence gold, US stocks, and even Taiwan stocks? Today, we will take a deep dive into this core indicator that global investors are paying close attention to.

What Is the Dollar Index? A Simple Analogy to Understand

The Dollar Index (abbreviated as USDX or DXY) is a “relative index” that measures the strength of the US dollar against other currencies, not an absolute value.

Imagine you look at the stock market and focus on the “S&P 500” or the “Dow Jones Industrial Average” to gauge overall market performance—the logic behind the Dollar Index is exactly the same—it tracks not stocks, but the exchange rate changes of the US dollar against six major currencies.

These six currencies are: Euro (EUR), Japanese Yen (JPY), British Pound (GBP), Canadian Dollar (CAD), Swedish Krona (SEK), and Swiss Franc (CHF).

In other words, the Dollar Index tells investors: Is the US dollar appreciating or depreciating relative to the world’s major currencies right now?

Since the US dollar is the primary global settlement currency, and commodities, energy, gold, and international investments are almost all priced in dollars, any fluctuation in the Dollar Index can trigger a chain reaction in global financial markets.

The Composition of the Dollar Index: Who Has the Largest Weight?

The Dollar Index is not simply an average of the six currencies; it uses a “geometric weighted average method,” allocating weights based on each country’s economic size, international trade volume, and currency influence.

The current weight distribution is as follows:

Euro (EUR) 57.6%, Japanese Yen (JPY) 13.6%, British Pound (GBP) 11.9%, Canadian Dollar (CAD) 9.1%, Swedish Krona (SEK) 4.2%, Swiss Franc (CHF) 3.6%.

The Euro dominates, accounting for over half of the weight, because 19 EU countries use the euro, and its economic size is enormous—second only to the US dollar among international currencies. Therefore, when observing the Dollar Index, the first thing to watch is the euro’s movement—any significant fluctuation in the euro will directly impact the entire index.

The Japanese Yen ranks second, as Japan is the third-largest economy globally, with very low interest rates and high liquidity, often used as a safe-haven asset by international funds. The remaining four currencies combined account for less than 30% of the weight, but the Swiss Franc still holds reference value due to its “stability and safety” characteristics.

In short, if you see the Dollar Index experiencing sharp fluctuations, the first step is to check whether there are major news or trend changes in the euro or yen.

When the Dollar Index Rises or Falls, Global Capital Flows Follow

When the Dollar Index rises

A rising dollar means the US dollar is strengthening relative to other major currencies. Since the dollar is the global benchmark for trading and pricing, many international commodities priced in dollars (like crude oil, gold, and bulk commodities) will become more expensive when the dollar appreciates, leading to decreased demand.

For the US economy, this is usually a positive signal:

A stronger dollar attracts global capital inflows into US markets, such as US Treasuries and US stocks, further reinforcing the dollar’s appreciation trend. The cost of imported goods decreases, benefiting consumers. However, for export-oriented economies (like Taiwan), the situation is different:

When the dollar appreciates and other currencies depreciate, goods priced in non-dollar currencies become cheaper internationally, but Taiwanese exports become relatively more expensive, reducing competitiveness and potentially impacting corporate revenues.

Emerging markets with large dollar-denominated debt will face increased debt repayment burdens when the dollar appreciates.

When the Dollar Index falls

A depreciating dollar indicates the dollar has lost its relative advantage in the international market. This often reflects concerns about the US economic outlook or optimism about other regions’ economies.

In this scenario, global capital may withdraw from the US and seek other investment opportunities, such as Asian stock markets or emerging markets.

For Taiwanese investors, the impact of a falling dollar index includes:

New capital may flow into Taiwan stocks, pushing up stock prices. The New Taiwan Dollar (NTD) may appreciate, lowering import costs but boosting export competitiveness. Investors holding US stocks or dollar deposits will face “currency losses”—a weaker dollar means fewer NT dollars when converting back.

How Is the Dollar Index Calculated? The Mathematical Logic Behind It

The Dollar Index is calculated using a formula involving a fixed constant and the exchange rates of the currencies raised to their respective weights. The “50.14348112” constant ensures that in 1985, the base year, the index started at 100.

Each term inside the parentheses represents the dollar’s exchange rate against another currency, weighted and raised to a power based on its weight. For example, the euro’s weight of 57.6% becomes 0.576 in the formula.

It’s important to understand that the Dollar Index is not an exchange rate or an absolute price but a relative index that reflects the overall strength or weakness of the dollar compared to other currencies since the base period.

A simple way to interpret the value:

• If the index is 100, it’s at the base level—no change.
• If it’s 76, the dollar has depreciated by 24% relative to the base.
• If it’s 176, the dollar has appreciated by 76% relative to the base.

Therefore, a higher Dollar Index indicates a stronger dollar in the international market; a lower index indicates a weaker dollar.

The Behind-the-Scenes Factors Influencing the Dollar Index

The fluctuations of the Dollar Index are driven by several key factors. Investors aiming to predict its direction should pay attention to these four main drivers:

The Federal Reserve’s (Fed) interest rate decisions are the most direct influence. Rate hikes increase the attractiveness of dollar assets, attracting global capital into US markets and pushing the dollar higher; rate cuts have the opposite effect. That’s why markets are highly sensitive to Fed meetings.

US economic data (such as non-farm payrolls, unemployment rate, CPI inflation, GDP growth) directly reflect the US economic health. Strong data boost investor confidence in dollar assets, raising the index; weak data can trigger confidence crises.

Geopolitical risks and international events (wars, political turmoil, regional conflicts) trigger safe-haven flows. During crises, the dollar often appreciates as the safest asset, which is why “the more chaotic, the stronger the dollar” sometimes becomes.

The movement of other major currencies also indirectly impacts the Dollar Index. Since the index is a relative measure (dollar vs. six currencies), even if the dollar itself doesn’t change, a decline in the euro, yen, or pound due to economic weakness or policy easing can cause the index to rise.

The Chain Reaction Between the Dollar Index and Global Assets

With Gold: The Pendulum Effect

Gold and the Dollar Index typically move inversely. When the dollar appreciates and the index rises, gold priced in dollars becomes more expensive, reducing global purchasing power and causing gold prices to fall. Conversely, when the dollar weakens, gold prices tend to rise.

However, gold prices are also influenced by inflation expectations, geopolitical risks, and real interest rates, so the Dollar Index is just one factor.

With US Stocks: A Complex Interaction

The relationship between the dollar and US stocks is not simply positive or negative but varies depending on market context.

Sometimes, a rising dollar attracts capital into US equities, boosting stocks. But if the dollar appreciates too much, it can weaken US export competitiveness, potentially dragging down the overall stock market.

For example, during the March 2020 global stock market crash, the dollar surged to an index of 103 due to safe-haven demand, but as the US COVID-19 situation worsened and the Fed engaged in massive money printing, the dollar quickly weakened to 93.78. This illustrates that the relationship between stocks and the dollar must be analyzed in conjunction with current economic conditions, not based on a single variable.

With Taiwan Stocks and the New Taiwan Dollar: Capital Flow Dynamics

The general pattern is: when the dollar appreciates, capital flows back to the US, the NT dollar may depreciate, and Taiwan stocks face pressure; when the dollar depreciates, capital flows into Asia, benefiting the NT dollar and Taiwan stocks.

But this is not an absolute rule. During optimistic global economic periods, US stocks, Taiwan stocks, and the dollar may all rise together; during black swan events, assets may decline simultaneously.

The Trade-Weighted Dollar Index: What the Fed Actually Watches

Media and investors often cite the “Dollar Index” to gauge dollar strength, but the Federal Reserve itself more frequently refers to the “Trade-Weighted Dollar Index.”

The Dollar Index compiled by ICE is a traditional indicator that includes only six major currencies, with the euro accounting for 57.6%. This index has a clear “Euro-American perspective.”

In contrast, the Trade-Weighted Dollar Index is calculated based on actual US trade partners, covering over 20 currencies, including the Chinese Renminbi, Mexican Peso, Korean Won, Taiwan Dollar, Thai Baht, and other emerging Asian currencies. This index more accurately reflects the US’s real international trade structure and the current global market situation.

In short, the Dollar Index is useful for quickly gauging market sentiment, while the Trade-Weighted Dollar Index provides a more realistic picture of dollar strength. Most investors only watch the Dollar Index, but for forex traders or macroeconomic researchers, the Trade-Weighted Index offers more insightful reference.

Conclusion

The Dollar Index is a key window into understanding global financial market trends. It’s not just a number but a comprehensive reflection of global capital flows, economic health, and market risk sentiment.

Gold, crude oil, stocks, exchange rates—all assets priced in dollars are influenced by fluctuations in the Dollar Index. Tracking its trends helps investors more accurately forecast asset values, assess risks, and seize market opportunities. Especially for forex traders, the Dollar Index is an essential fundamental tool.