How Is the US Dollar Index (DXY) Calculated?

The US Dollar Index (DXY) serves as a key measure of the U.S. dollar’s value. It provides a comprehensive assessment of the dollar’s performance against a selection of significant global currencies. This index helps market participants, economists, and analysts gauge the overall health and international standing of the U.S. dollar. The DXY offers a standardized way to analyze fluctuations in the dollar, reflecting its relative strength or weakness in the global currency market.

The Basket of Currencies

The DXY is composed of six major foreign currencies, each assigned a specific fixed percentage weighting. These currencies were selected when the index was established in 1973, shortly after the Bretton Woods system of fixed exchange rates was dissolved. The inclusion of these particular currencies was based on their status as major trading partners of the United States at the index’s inception.

The currencies and their weightings are:
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%

A significant aspect of the DXY’s composition is that these weights have remained largely unchanged since its creation. The only modification occurred in 1999 when the euro was introduced, replacing several European currencies that were previously part of the index, such as the German Mark and French Franc. Despite shifts in global trade patterns over the decades, the established weightings for the DXY have been maintained.

The Calculation Methodology

The U.S. Dollar Index is mathematically derived using a geometrically weighted average of the exchange rates of its constituent currencies against the U.S. dollar. The formula for calculating the DXY is specific and involves a constant multiplier along with the exchange rates raised to their respective fixed powers.

The precise formula used is: DXY = 50.14348112 × EURUSD^-0.576 × USDJPY^0.136 × GBPUSD^-0.119 × USDCAD^0.091 × USDSEK^0.042 × USDCHF^0.036. In this formula, the exchange rates are expressed with the U.S. dollar as either the base or quote currency. A negative exponent indicates that the U.S. dollar is the quote currency (e.g., EUR/USD), while a positive exponent indicates the U.S. dollar is the base currency (e.g., USD/JPY). The index was launched in March 1973 with an initial base value of 100.000.

The DXY is calculated in real-time, with updates occurring approximately every 15 seconds. This continuous calculation relies on the spot prices of the underlying currencies, specifically using the midpoint between the bid and offer prices for each currency pair. The geometric weighting ensures that the index reflects the proportional impact of each currency’s movement on the overall value of the dollar, rather than a simple arithmetic average.

Interpreting the DXY’s Value

The resulting number from the DXY calculation signifies the U.S. dollar’s value relative to its base value of 100.000 from March 1973. An increase in the DXY value indicates that the U.S. dollar is strengthening against the basket of currencies. Conversely, a decrease in the DXY value suggests that the U.S. dollar is weakening.

For example, a DXY reading of 105 means the dollar has appreciated by 5% compared to its 1973 starting point, while a reading of 95 indicates a 5% depreciation. The DXY is commonly quoted as a points value and is widely referred to by its ticker symbols such as DXY, USDX, or DX. The official trading and tracking of the DXY occur on ICE Futures U.S., a subsidiary of the Intercontinental Exchange (ICE).

Investors and traders can engage with the index through futures and options contracts, or indirectly via exchange-traded funds (ETFs) and mutual funds that mirror its performance. The DXY serves as a broad indicator of the dollar’s performance and holds significance across global financial markets. It offers insights into the dollar’s overall sentiment and its potential impact on commodity prices, which are often denominated in U.S. dollars. Monitoring the DXY provides a general understanding of the dollar’s position in international trade and finance.