What Is the U.S. Dollar Index (USDX) & How to Utilize It

By Andrew Moran

Edited by Dragan Stevanovic

Published May 21, 2024.

The U.S. dollar is the chief international reserve currency, representing nearly two-thirds of global reserves, according to the International Monetary Fund (IMF). 
Since the coronavirus pandemic, the greenback has also been one of the strongest currencies, rivaling that of the Swiss franc. Because of its importance on the world stage, global financial markets pay close attention to the U.S. Dollar Index (USDX).
Note: Fortrade offers the ability to trade the price changes of instruments with CFDs and NOT to buy/sell ownership of instruments themselves. All the information in this blog is purely educational and should NOT be considered advice.
Understanding the U.S. Dollar IndexThe USDX originally came about in 1973, shortly after the dissolution of the Bretton Woods Agreement, which stated that countries settle their balances in dollars and gold. 
Former President Richard Nixon suspended the agreement due to concerns over the exchange rates. This also meant that other countries could choose any exchange agreement other than gold. 
In 1973, several countries let their currency rates float, which marked the inception of USDX.
Today, USDX reflects the health of the U.S. economy and helps traders who speculate on the change in the dollar's value.
 
USDX index represents the strength of the US dollar weighted against six currencies. Source: Google Finance﻿
The U.S. Dollar Index is measured against a basket of six currencies:
Euro
Japanese yen
British pound sterling
Canadian dollar
Swedish krona
Swiss franc
Together, these create the USDX index, which primarily measures the dollar's strength against these currencies.
Since the index started, the basket of currencies has only changed once, when the euro replaced several other European currencies.
The index uses a weighting scheme in which the euro makes the largest component. 
If the USDX goes up, that means the U.S. dollar is gaining strength compared to the other currencies in the basket. 
If the index goes down, the U.S. dollar is losing strength compared to the other currencies.
How to Calculate USDXMacroeconomic factors, such as inflation/deflation, recession, and economic growth determine the USDX. 
Each currency in the USDX basket holds a weight: 
CurrencyWeight (in %)
Euro57.6
Japanese yen13.6
British pound sterling11.9
Canadian dollar9.1
Swedish krona4.2
Swiss franc3.6
The index calculates the weighted average of the US dollar exchange rate against these currencies normalized by an indexing factor. The formula for calculating the USDX is:
USDX = 50.14348112 × EURUSD^-0.576 × USDJPY^0.136 × GBPUSD^-0.119 × USDCAD^0.091 × USDSEK^0.042 × USDCHF^0.036
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Why the USDX Matters to TradersThe U.S. dollar is one of the crucial currencies in the global market. Traders will often analyze the USDX before making trading decisions to gauge market sentiment, currency pairs movements, and economic factors at play.
Shares MovementShare prices can move with changes in the value of the U.S. dollar. Changes in the USDX also affect currency pairs.
For example, if the USDX increases and the trader trades the EUR/USD pair, the rising U.S. dollar will cause a downward trend on the EUR/USD chart. 
On the other hand, a currency pair based on the U.S. dollar currency will show a different trend. For instance, in the case of USD/CHF, if the USDX increases, there will likely be an increase in the USD/CHF charts.
Commodity PricesIf the U.S. dollar increases in value, commodity prices tend to fall—and vice versa. This is because most commodity prices are denominated in the US dollar.
A common example of this is crude oil. The energy commodity is in an inverse relationship with the U.S. dollar: if the U.S. dollar increases, crude oil falls. When the buck slides, oil prices rise. This is because oil is priced in dollars, so a weaker dollar makes oil cheaper for international markets to buy.
﻿Gold also has an inverse relationship with the U.S. dollar. When the U.S. dollar weakens, gold prices increase, and when the U.S. dollar is strong, gold prices decrease.
» Learn about the difference between major and minor currency pairs﻿
Practical Ways to Utilize the USDXThe USDX is an index and cannot be traded directly. However, you can trade it through currency pairs, futures, options, and exchange-traded funds (ETFs). 
Traders use the USDX to mitigate currency risk and speculate on the future direction of the dollar. 
The USDX also provides diversification possibilities for traders and can help in determining potential entry and exit points.
» Brush up on your trading knowledge by reading about long positions vs. short positions.
Strong CurrencyThe U.S. dollar is the premier global reserve currency. The index is seen as a good benchmark for governments and financial markets because its strength or weakness can create a cascading effect.
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Stay up to date with the latest developments in the USDX by monitoring news outlets like CNBC, subscribing to trading platforms like Fortrade, or enrolling in financial courses like Fortrade Online Academy.