Dollar Index (USDX) Quick Guide: Mastering the Key to Global Capital Flows

Why Should You Pay Attention to the US Dollar Index?

If you have experience investing in forex, US stocks, or gold, you’ve probably heard phrases like “the US dollar index is strengthening.” But what exactly is the US dollar index measuring? Why do financial markets attach so much importance to it? Simply put, the US dollar index is a barometer of global finance—it tracks the strength of the dollar against other major currencies, and its rise or fall directly influences the flow of capital worldwide.

Composition of the US Dollar Index: The Power Comparison of Six Major Currencies

The US Dollar Index (USDX or DXY) is not a single exchange rate but a weighted basket of the dollar against six international currencies. These currencies and their respective weights are:

The euro dominates because the Eurozone covers 19 countries with a large economy. This also means the economic direction of Europe has the greatest impact on the US dollar index—monitoring euro movements can often give early hints about the index’s trend.

The Mathematical Logic of the US Dollar Index

The US dollar index is calculated using a “geometric weighted average” method. The core principle is: a weighted combination of the dollar’s exchange rates against each country’s currency, multiplied by a base period conversion factor.

The key is understanding what this number means:

• 100 = baseline level, no change
• 120 = 20% above the baseline, dollar has appreciated by 20%
• 80 = 20% below the baseline, dollar has depreciated by 20%

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

The Practical Impact Chain of USD Index Fluctuations

When the US dollar index rises

A stronger dollar means three main changes:

1. Commodity Prices — Crude oil, gold, agricultural products priced in USD become relatively cheaper (because the dollar is stronger)

2. Capital Flows — US assets (Treasuries, US stocks) become more attractive, leading to a return of hot money to the US; emerging markets face capital outflows

3. Export Competitiveness — Export-oriented economies like Taiwan see their goods priced in USD become relatively more expensive, making sales harder and squeezing corporate profits

When the US dollar index falls

A weaker dollar triggers the opposite chain reaction:

1. Emerging Markets Become More Attractive — Investors withdraw from USD assets and seek opportunities in Asian stocks and bonds

2. Local Currency Appreciation — TWD, KRW, CNY may appreciate simultaneously, making imports cheaper but boosting export competitiveness

3. USD Asset Losses — Your holdings in US stocks or USD deposits may shrink in value due to exchange rate depreciation, known as “currency loss”

The Interaction Between the US Dollar Index and Major Assets

US Dollar Index vs Gold

This is the classic “see-saw” relationship:

• USD appreciation → Cost of buying gold in USD rises → Gold demand drops → Gold prices weaken
• USD depreciation → USD purchasing power declines → Investors turn to gold for safety → Gold prices strengthen

But remember: Gold is also influenced by inflation, geopolitical risks, central bank policies, and other factors, so it’s not solely driven by the dollar.

US Dollar Index vs US Stocks

This relationship is not linear and varies depending on market context:

• Positive correlation — USD rising indicates a strong US economy, attracting capital into US stocks, pushing indices higher
• Negative correlation — Excessively strong USD can hurt US exporters, dragging down stock prices

For example, in 2020: During the March global stock crash, the USD index surged to 103 (safe-haven buying); but due to the pandemic and Fed stimulus, the dollar quickly fell back to 93.78. This shows that economic policies, corporate earnings, and other factors must be considered together, not just the dollar trend alone.

US Dollar Index vs Taiwan Stock Market / New Taiwan Dollar

Broadly:

• USD rising (index up) → Capital flows back to the US → TWD depreciates, Taiwan stocks face pressure
• USD falling (index down) → Capital flows into Asia → TWD appreciates, Taiwan stocks perform better

But this is not an absolute rule. When global risk appetite is high, investors are willing to take risks, and US stocks, Taiwan stocks, and the dollar may all rise together; during black swan events, all asset classes can decline simultaneously.

Four Major Factors Driving USD Index Movements

1. Federal Reserve Interest Rate Policy (Most Direct Impact)

This is the most sensitive nerve of the dollar:

• Rate hikes → Higher interest on dollar deposits → Global capital rushes into dollar assets → USD index rises
• Rate cuts → Reduced attractiveness of the dollar → Capital flows out of the US → USD index falls

Every Fed meeting causes markets to hold their breath, as interest rate decisions directly influence dollar strength.

2. US Economic Fundamentals

Employment data (non-farm payrolls, unemployment rate), CPI inflation, GDP growth are windows into the US economy:

• Strong data → US economy is healthy → Dollar is favored → Index rises
• Weak data → Market confidence wanes → Dollar weakens → Index falls

3. Geopolitics and Risk Aversion

Wars, political turmoil, regional conflicts can trigger global panic. During such times, markets seek “the safest currency”, and the dollar, backed by the world’s largest economy, is often the first choice. Sometimes, “the more chaotic, the more buying dollars”—not because of optimism about the US economy, but purely for safe-haven reasons.

4. Movements of Other Major Currencies

Remember: The USD index is a relative measure. Even if the dollar itself doesn’t move, when euro, yen, or other currencies weaken due to economic weakness or loose policies, the USD index will rise automatically—because the benchmark has weakened.

USD Index vs Trade-Weighted US Dollar Index: Which Is More Important?

Investors often look at the “USD index,” but the Fed uses the “Trade-Weighted US Dollar Index” more frequently. There are fundamental differences:

US Dollar Index (DXY)

• Created by: ICE (Intercontinental Exchange)
• Contains currencies: 6 (EUR, JPY, GBP, CAD, SEK, CHF)
• Features: Heavy euro weighting (57.6%), skewed towards Europe and the US-Europe perspective
• Usage: Media reports, quick sentiment gauge

Trade-Weighted US Dollar Index

• Created by: Federal Reserve
• Contains currencies: 20+ including CNY, KRW, TWD, THB, etc.
• Features: Based on actual US trade partner weights, more aligned with current global market conditions
• Usage: Fed policy decisions, in-depth macro analysis

Simple judgment: For most investors, the USD index suffices; if you’re involved in forex trading or follow Fed policies, refer to the trade-weighted index.

Quick Judgment Rules

Want a quick understanding of what the USD index means for your investments? Remember this chart:

When the USD index rises:

• ✓ US stocks / US bonds: assets valued in TWD increase (currency gains)
• ✗ Export companies: goods become relatively more expensive, competitiveness declines
• ✗ Taiwan stock investors: capital may flow out, stock market under pressure
• ✓ Gold bears: gold prices fall

When the USD index falls:

• ✗ US stocks / US bonds: assets valued in TWD decrease (currency losses)
• ✓ Export companies: goods become more competitive
• ✓ Taiwan stock investors: foreign capital may return, stocks perform better
• ✓ Gold bulls: gold prices rise

Conclusion

The US dollar index is like a thermometer of global capital flows—rising indicates capital is gathering in the US; falling suggests funds are seeking new opportunities elsewhere. Whether you invest in US stocks, gold, Taiwan stocks, or forex, the trend of the USD index will have a profound impact on your portfolio.

Mastering the USD index isn’t just about understanding a number; it’s about grasping the underlying logic: Is the Fed’s policy driving it? Or geopolitical risks creating panic? Is the US economy truly strengthening, or is it just investor sentiment? Understanding these cause-and-effect relationships allows you to make more confident investment decisions in the global financial markets.