US dollar index (USDX) definition

Currencies , Economic Indicators , US Dollar , USA Jan 18, 2015 No Comments

US dollar index (USDX) definitionThe US Dollar Index (USDX) was launched after the end of the Bretton Woods fixed exchange rate system agreement in 1973 by the New York Board of Trade (NYBOT). At its inception, the US Dollar Index was set at a base value of 100. It is an index (or measure) of the value of the United States dollar relative to a basket of foreign currencies.

It has since then ranged between 164.72, in February 1985, and its all-time low of 70.70 on March 16, 2008. The reading is interpreted by comparing its current value and change of the dollar’s strength against its counterparts to its initial value.

It is a weighted geometric mean of the dollar‘s value relative to other select currencies:

  • Euro (EUR), 57.6% weight
  • Japanese yen (JPY) 13.6% weight
  • Pound sterling (GBP), 11.9% weight
  • Canadian dollar (CAD), 9.1% weight
  • Swedish krona (SEK), 4.2% weight
  • Swiss franc (CHF) 3.6% weight

The dollar index is calculated by Reuters in real time every 15 seconds based on the spot prices of the index’s underlying currencies. The price used for the calculation is the mid-point between the Reuters top of the book bid/offer in the component currencies. The real-time quote is then delivered to the Intercontinental Exchange and is then redistributed to other data suppliers.

The make up of the “basket” has been altered only once, when several European currencies were subsumed by the euro at the start of 1999. The make up of the “basket” is overdue for revision as the index doesn’t reflect the current economic landscape anymore: moves in the Euro are dominating the index, there is only one asian currency and China, Mexico, South Korea and Brazil are major trading partners presently which are not part of the index whereas Sweden and Switzerland are continuing as part of the index.

With the US Dollar Index being so influenced by the Euro, some traders and analysts favour the Trade Weighted Dollar Index. The Trade Weighted Index aims more accurately reflect the strength of the US Dollar, by including a wider range of basket currencies and by weighting the respective currencies differently.

Pascal Blanc

Pascal has implemented numerous software solutions in the areas of procurement, sourcing, spend management, supplier evaluation and performance. His clients include Fortune 500 companies in Europe, Asia and North America. He is a co-founder of Source & Procure.

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