Master the key secrets to understanding the fluctuations of the US Dollar Index and global capital flows

The “US Dollar Index” (USDX or DXY) may feel unfamiliar to many investors. However, if you are involved in stocks, forex, or other financial assets, this indicator’s importance cannot be underestimated. The US Dollar Index acts like a weather vane for the global financial markets, reflecting the relative strength of the US dollar within the international monetary system, and thereby influencing gold, crude oil, stocks, and even the overall economy.

What exactly is the US Dollar Index? Why is it worth paying attention to?

The US Dollar Index (abbreviated as USDX or DXY) does not represent the price of a specific stock or commodity. Instead, it is a comprehensive “relative index” that tracks the exchange rate movements of the US dollar against six major international currencies.

These six currencies are:

• Euro (EUR): the highest weight, accounting for about 57.6%
• Japanese Yen (JPY): about 13.6%
• British Pound (GBP): about 11.9%
• Canadian Dollar (CAD): about 9.1%
• Swedish Krona (SEK): about 4.2%
• Swiss Franc (CHF): about 3.6%

In short, the US Dollar Index reflects the question: “Is the US dollar appreciating or depreciating relative to other major international currencies?” Because the dollar is the world’s primary medium of exchange—used in commodity trade, energy transactions, gold trading, and cross-border investments—fluctuations in the USDX can have widespread chain reactions.

The practical impact of USDX fluctuations on investments

When the US Dollar Index rises

A rising USDX indicates the US dollar is appreciating relative to other major currencies. This has distinctly different effects on the global economy:

Benefits for the US economy:

• Lower costs for imported goods, making foreign products cheaper for US consumers
• International capital inflows driven by higher yields on dollar-denominated assets, attracting foreign investment into US Treasuries and stocks
• Helps curb domestic inflation and supports economic growth

Challenges for other economies:

• Export-oriented economies (like Taiwan) face difficulties—export goods become more expensive internationally, reducing competitiveness
• Emerging market countries with large dollar-denominated debt face increased repayment pressures

When the US Dollar Index falls

A declining USDX indicates the US dollar is depreciating relative to other currencies. Market risk appetite increases, and capital begins seeking higher-yielding investments, often leading to capital flowing out of dollar assets and into emerging markets and Asian stock markets.

Potential benefits for Taiwan market:

• Foreign capital inflows boost Taiwan stocks, driving prices higher
• The New Taiwan Dollar faces upward pressure, lowering import costs but potentially harming export competitiveness
• Investors holding dollar assets should be alert to “exchange loss” risks—dollar depreciation means less NT$ when converting back

The interaction between the US Dollar Index and global assets

The USDX does not exist in isolation; it interacts complexly with various asset classes:

Gold Market

Gold and the USDX generally show an inverse relationship. When the dollar appreciates, the cost of gold priced in dollars rises, reducing international buyers’ willingness to purchase, leading to a decline in gold prices; the opposite is also true. However, gold prices are also influenced by inflation expectations, geopolitical tensions, oil prices, and other factors, so relying solely on the USDX is insufficient.

US Stock Market Performance

The relationship between US stocks and the USDX is not simply positive or negative. Sometimes, a stronger dollar coincides with capital inflows into the US, pushing stocks higher; but if the dollar appreciates excessively, it can hurt US export profits, dragging down the overall stock market. In early 2020, during the pandemic, the USDX rose to a high of 103 (reflecting risk aversion), but later, with the Federal Reserve’s easing policies, it quickly fell back to 93.78.

Taiwan stocks and the New Taiwan Dollar

Generally, when the USDX rises, capital flows back to the US, putting downward pressure on the NT$, and Taiwan stocks may face selling pressure. Conversely, when the USDX falls, the opposite tends to happen. However, market sentiment swings can break this relationship—when global economic confidence is high, US stocks, Taiwan stocks, and the dollar may all rise together; during black swan events, stocks, forex, and bonds may all plunge simultaneously.

What drives the movements of the US Dollar Index?

Understanding the fundamental reasons behind USDX fluctuations helps investors better predict market trends:

Federal Reserve interest rate policies

This is the most direct factor influencing the USDX. Raising interest rates increases dollar yields, attracting global capital into the US, causing the USDX to rise; lowering rates prompts capital outflows, leading to a decline. Each Fed decision often triggers significant market reactions due to this direct transmission mechanism.

US economic data

Non-farm payrolls, unemployment rate, CPI inflation, GDP growth, and other data are key indicators of US economic strength. Strong data tends to boost the dollar; weak data exerts downward pressure.

Geopolitical risks

Wars, political turmoil, regional conflicts, and other events trigger safe-haven demand. The dollar, as the safest asset, often appreciates during crises—explaining why “the dollar gets stronger in chaos” even though it seems counterintuitive.

Other countries’ currency movements

Since the USDX is a relative index, when currencies like the euro, yen, or pound weaken due to economic downturns, loose policies, or political instability, the USDX can rise even if the dollar itself isn’t appreciating. Weakness in other currencies can lift the USDX.

US Dollar Index vs. US Trade-Weighted Index: Which is more important?

Investors often look at the USDX when assessing dollar strength, but the Federal Reserve more frequently references the “US Dollar Trade-Weighted Index.” Although they seem similar, there are significant differences:

The USDX is a traditional indicator suitable for quick market sentiment assessment; the trade-weighted index better reflects the actual trade relationships and purchasing power of the dollar. For general investors, the USDX suffices; for macroeconomic research or forex trading, the trade-weighted index offers deeper insights.

How is the US Dollar Index calculated?

The USDX uses a geometric weighted average method. In simple terms, it is not a straightforward average of six currencies but weighted according to the relative importance of each economy’s trade volume and economic size. The index is set to 100 in 1985, which serves as the base period.

Meaning of index values:

• 100: equal to the base period, indicating no change in dollar value
• 76: down 24% from the base, indicating dollar depreciation
• 176: up 76% from the base, indicating dollar appreciation

Thus, a higher USDX signifies a stronger dollar in the international market; a lower USDX indicates a weaker dollar.

How should investors apply the US Dollar Index?

The USDX is a key to understanding global capital flows and asset price fluctuations. Whether you invest in gold, oil, stocks, or forex, the USDX provides valuable reference information.

Grasping the core logic—when the dollar appreciates, capital flows back to the US; when it depreciates, capital moves to emerging markets—can help investors anticipate market directions and adjust their portfolios accordingly. Especially in forex trading, the USDX is an indispensable reference that guides your trading decisions.