Keeping up with our tour around the various indices that have a decisive influence on global financial markets, today is the turn of the U.S. Dollar Index (DXY). Surely those who have their day to day anchored to finance and markets, know perfectly well of its existence. But behind this index, which daily returns the value of the dollar as a global currency, there is a history and a specific function beyond the register.
U.S. Dollar Index (USDX) and the Currency Basket
If we were to give a specific definition of the U.S. Dollar Index (DXY), we would say it’s an index that measures the value of the U.S. dollar, in relation to a currency basket that includes the strongest currencies in the world.
The index is established as a weighted average of the 6 currencies that make up the basket. The weighting arises from the fact that each of these currencies has a different impact on the elaboration of the index.
The currency basket is made up of the dollar prices of the following: the euro, which represents 57.6% of the index weighting; the Japanese yen with 13.6%; the sterling pound, representing 11.9%; the Canadian dollar with an impact of 9.1%; the Swedish krona with 4.2%; and finally, the Swiss franc with 3.6%.
After the creation of the European Union’s single currency, it replaced several European national currencies such as the Deutsche Mark. Some currencies with a strong impact on trade relations with the United States are still not taken into account: we are talking about the Chinese Yuan and the Mexican peso.
A bit of history
The U.S. Dollar Index (USDX) was born in 1973, with a 100 basis. If we look at the year of the beginning of its measurements, we can see that this index is the result of the rupture of the Bretton Woods Agreements, which we have already analyzed. The exit of the United States from convertibility with gold as the standard, after a deep crisis during the government of Richard Nixon, forced the world powers to have a measurable variable that would allow us to see the evolution of a currency with a deep global impact.
The rise or fall of this index shows a general panorama of the behavior of the global economy. Its highest record dates back to February 1985 when it reached 164.72 points. The lowest was 70.698 and it was recorded during the beginning of the mortgage crisis in March 2008.
This has been a small summary of the U.S. Dollar Index (USDX) and we hope to have contributed to a deeper understanding of financial market indicators for the people who are just entering the world of market operations.