In-depth analysis of the US Dollar Index components and operating principles: Mastering the key to global capital flows

What Is the US Dollar Index Really Measuring?

When you see news headlines mentioning “Dollar Strength” or “Dollar Weakness,” what they are actually referring to is the change in the US Dollar Index (USDX or DXY). The core logic of this index is simple: it provides a number that tells you whether the dollar is appreciating or depreciating relative to other major international currencies.

Imagine the components of the US Dollar Index as a “global currency check-in sheet.” The dollar is compared against six key currencies, and through their exchange rate movements, the index reflects the dollar’s strength in the global financial market. This design is important because the dollar nearly dominates the pricing of global commodities, energy, gold, and other assets—meaning that fluctuations in the US Dollar Index can act like dominoes, influencing the entire financial market trend.

What Are the Six Currencies in the US Dollar Index?

The calculation of the US Dollar Index is not an average of the six currencies but a weighted calculation based on each country’s economic strength and trading volume. The current composition is as follows:

The absolute dominance of the euro comes from the EU’s large economic size—19 EU countries adopt the euro, representing nearly 20 developed economies. Combined with the other five currencies, the components of the US Dollar Index actually reflect the economic conditions of over 24 developed countries.

Because the euro accounts for more than half of the index, observing the euro’s trend often allows for a forecast of the US Dollar Index’s direction. The Japanese Yen ranks second due to Japan being the third-largest economy and its unique safe-haven status.

What Happens When the US Dollar Appreciates or Depreciates?

Chain Reaction When the US Dollar Index Rises

When the index value increases, it indicates the dollar is strengthening against other currencies. Several clear market phenomena occur at this stage:

Impact on the US

• Imported goods become cheaper because the dollar is more valuable, requiring fewer dollars to buy overseas products
• Global capital flows into the US, as dollar-denominated assets like US Treasuries and stocks become more attractive
• US export competitiveness declines because US goods become relatively more expensive for foreign buyers

Impact on Other Economies

• Export-oriented economies (like Taiwan, South Korea) face challenges—goods become more expensive, reducing competitiveness in the US market
• Emerging markets with dollar-denominated debt face increased repayment pressure
• Their currencies tend to depreciate, and capital may flow out

Chain Reaction When the US Dollar Index Falls

A declining index indicates a weakening dollar, shifting market confidence—investors start pulling funds out of the dollar and seeking other opportunities.

Effects on Taiwan and other Asian markets

• Hot money flows into Taiwan stocks, supporting the market and giving it upward momentum
• The New Taiwan Dollar (NTD) may appreciate, making imports cheaper but putting pressure on exports
• If you hold US stocks or dollar deposits, a depreciation of the dollar can reduce your assets’ value

How to Understand the Relationship Between the US Dollar Index and Global Assets?

US Dollar Index and Gold: The See-Saw Effect

The relationship between gold and the dollar is the most direct and clear: a strong dollar means weak gold, and a weak dollar means strong gold.

This is because gold is priced in USD. When the dollar appreciates, the cost for foreign buyers to purchase gold increases, demand drops, and gold prices tend to fall. Conversely, when the dollar depreciates, gold becomes relatively cheaper, attracting more buyers and pushing prices higher. Of course, gold prices are also influenced by inflation, geopolitical factors, and other variables, but changes in the US Dollar Index components are a key driver.

US Dollar Index and US Stocks: Complex Interactions

The relationship between the dollar and US stocks is not simply positive or negative; it varies depending on market context:

Sometimes, dollar appreciation attracts capital inflows into US equities, boosting the stock market. But if the dollar rises too sharply, it can weaken US export competitiveness, dragging down stocks. The market in 2020 exemplified this complexity—initially, during the early pandemic, safe-haven demand pushed the dollar index to 103, but later, the Fed’s aggressive easing caused the dollar to weaken rapidly to 93.78.

Conclusion: Don’t look at a single factor alone—consider the current economic policies and market sentiment.

US Dollar Index and Taiwan Stock Market, New Taiwan Dollar

Generally, dollar appreciation increases US investment attractiveness, leading to capital outflows from Asia, causing the NT dollar to depreciate and Taiwan stocks to come under pressure. Conversely, dollar depreciation makes Asian assets relatively cheaper, attracting capital back in, with the NT dollar appreciating and stocks benefiting.

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

What Factors Drive Changes in the US Dollar Index Components?

Federal Reserve Interest Rate Policies

This is the most direct influence. When interest rates rise, US dollar interest income increases, attracting global capital seeking higher returns—leading to dollar appreciation and a rising index. Lowering rates has the opposite effect, causing capital to flow out and the dollar to weaken.

US Economic Data

Employment figures (non-farm payrolls, unemployment rate), CPI inflation data, GDP growth—when these numbers are strong, markets are optimistic about the US economy, and the dollar tends to strengthen. Weak data has the opposite effect.

Geopolitical and Black Swan Events

Wars, political turmoil, regional conflicts often trigger safe-haven demand. The dollar, as the safest asset, tends to appreciate during chaos. This may seem counterintuitive, but “the more chaotic, the more buying of dollars” is a true market phenomenon.

Movements of Other Major Currencies

Since the US Dollar Index components are relative values, when currencies like the euro, yen, or pound weaken due to their own economic issues or easing policies, the index can rise even if the dollar itself doesn’t actively appreciate. The depreciation of other currencies alone can push the index higher.

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

US Dollar Index (DXY)

• Compiled by ICE, the most common and media-favored indicator
• Includes only six major currencies
• The euro has the largest share (57.6%), giving it a distinctly European-American perspective

Trade-Weighted US Dollar Index

• Compiled by the Federal Reserve, the indicator the Fed actually monitors
• Covers over 20 currencies, including RMB, Mexican Peso, Korean Won, NT dollar, and other Asian emerging market currencies
• More closely reflects the actual trade partners of the US and the current global market conditions

Practical Advice: If you are a general investor wanting a quick sense of market sentiment, the US Dollar Index is sufficient. But if you are involved in forex trading or macroeconomic research, the trade-weighted index provides a deeper, Fed-aligned reference.

Summary: Why Track the US Dollar Index?

Although the US Dollar Index components only include six currencies, they represent the economic conditions of over 24 developed economies worldwide. Its fluctuations not only impact currency markets but also ripple through gold, crude oil, stocks, and other assets.

Understanding the logic behind the US Dollar Index and its directional changes can help you:

• Judge global capital flows
• Predict potential trends in US stocks, gold, and Taiwan stocks
• Capture opportunities in forex trading
• Assess exchange rate risks

Whether you are a stock investor, forex trader, or simply want to understand market dynamics, the US Dollar Index is the key to unlocking the global financial market.