Master the movement of the US Dollar Index to optimize your global asset allocation

Wanting to take control in the global financial markets means understanding a core “weather vane”—the US Dollar Index. Whenever you see news mentioning “Dollar strengthening” or “Dollar depreciating,” there’s a hidden story behind capital flows, exchange rate fluctuations, and changes in your investment portfolio value.

Why is the US Dollar Index so important? One chart to understand its global influence

The US Dollar Index (abbreviated USDX or DXY) may seem like just a number, but it is almost a compass for global capital flows. Why? Because the dollar is the most widely used trading currency worldwide, with most international commodities, energy, gold, and bonds priced in USD.

When the Dollar Index fluctuates, it directly influences:

• US stocks and emerging market equities: When the dollar appreciates, capital tends to flow back to the US, favoring US stocks; when it depreciates, Asian markets and emerging economies become hot targets for hot money
• Gold and crude oil prices: Both are quoted in USD; a stronger dollar makes them more expensive, reducing demand
• Your USD assets: The value of US stocks, US bonds, and USD deposits will fluctuate accordingly
• New Taiwan Dollar and Taiwan stocks: Dollar appreciation often leads to capital outflows from Taiwan, causing TWD depreciation and pressure on the Taiwan stock market; the opposite also applies

In simple terms, the US Dollar Index is a “asset allocation compass” that global investors must constantly watch.

What exactly is the US Dollar Index? How does it define global currency strength

If you look at the stock market using the “S&P 500” or “Dow Jones” to gauge US stock trends, then the US Dollar Index is used to measure the relative strength of the dollar.

Its mechanism is straightforward: tracking the exchange rate changes of the dollar against six major international currencies, to assess the dollar’s relative position in the global market.

These six currencies are:

In other words, the Dollar Index answers the question: “Is the dollar appreciating or depreciating relative to major international currencies?”

It’s important to note that these six currencies represent more than just six countries. The euro alone is used by 19 EU member states, plus other countries using these currencies, covering over 24 developed economies. This explains why the USDX holds such authority and influence in global financial markets.

How do fluctuations in the US Dollar Index affect your investments?

Chain reaction of USDX rising

When news reports “Dollar Index hits a new high,” it means the dollar has appreciated—other major currencies (euro, yen, etc.) have depreciated relative to it.

Short-term benefits for the US economy:

• Imported goods become cheaper, boosting US consumers’ purchasing power
• US bonds and dollar assets become more attractive, attracting global hot money into US financial markets
• Helps curb inflation

Impact on global investors:

• Export-oriented economies like Taiwan face pressure: goods become more expensive, competitiveness declines, corporate profits are limited
• Countries with dollar-denominated debt, especially in emerging markets, face increased debt repayment pressure
• Holders of USD assets see short-term paper gains, but must beware of exchange losses if the dollar weakens again later

Chain reaction of USDX falling

Dollar Index decline = dollar depreciation = market confidence in USD drops

At this point, investors will withdraw funds from USD assets and shift to other opportunities. For Taiwanese investors:

• Hot money flows into Taiwan stocks: capital inflow, stock prices may rise
• TWD appreciates: import goods become cheaper, but export competitiveness decreases
• Risk of USD asset depreciation: if you hold US stocks or USD deposits, converting back to TWD will result in fewer units—this is “exchange loss”

How is the US Dollar Index calculated? The underlying weighting logic

The USDX uses a geometric weighted average calculation, meaning it’s not a simple average of six currencies, but weighted based on each country’s economic size, trade volume, and currency influence.

From the weight distribution, you can see:

• Euro accounts for over half (57.6%): The eurozone has many countries with large economies; the euro is the second-largest international reserve currency, so any euro fluctuations significantly impact the USDX
• Japanese Yen second (13.6%): Japan is the third-largest economy; low interest rates and high liquidity make yen a common safe-haven currency
• The other four currencies combined account for less than 30%: but each has its characteristics, e.g., Swiss Franc is known for “stability and safety,” often sought during crises

Practical tip: If you see large swings in the USDX, check whether there are economic or political events in Europe or Japan. Usually, EU policy changes or BOJ decisions cause the most volatility.

While the calculation formula looks complex, the core concept is simple: a higher USDX indicates a stronger dollar; a lower USDX indicates a weaker dollar. For example, if the index drops from 100 to 76, the dollar has depreciated by 24% relative to the base; if it rises from 100 to 176, it has appreciated by 76%.

The relationship map: USDX vs. global assets

USDX vs. Gold: the classic “see-saw” relationship

Gold is priced in USD, and the two tend to move inversely:

• Dollar appreciation → Gold price drops (cost to buy gold in USD rises, demand falls)
• Dollar depreciation → Gold price rises (cost decreases, attracting more buyers)

But remember, gold prices are also influenced by geopolitical events, inflation expectations, wars, etc., so don’t rely solely on USDX for judgment.

USDX vs. US stocks: a complex relationship, depends on context

Many think that a strong dollar means strong US stocks, but the relationship varies with market background:

• Sometimes, USD appreciation → inflow of capital into the US → stock market rises
• But if the dollar becomes too strong, it can hurt US export competitiveness, dragging stocks down

For example, in March 2020, global stocks plummeted, but the USD rose to 103 due to safe-haven demand; later, as the US COVID-19 situation worsened and the Fed flooded the market with liquidity, the dollar quickly weakened to 93.78.

Conclusion: US stocks and the USDX are not fixed in a positive or negative correlation; it depends on economic policies and market sentiment at the time.

USDX vs. Taiwan stocks/TWD: capital flow is key

The general pattern is:

• USD appreciation (index rises) → capital exits Asia → TWD depreciates, Taiwan stocks face pressure
• USD depreciation (index falls) → capital flows into Asia → TWD appreciates, Taiwan stocks perform well

But this is not a strict rule. During global risk asset rallies, US stocks, Taiwan stocks, and the dollar may all rise together; during black swan events, assets may fall simultaneously.

What drives the rise and fall of the US Dollar Index?

Federal Reserve interest rate policies—the most direct driver

The Fed’s decisions are almost the most immediate factor influencing the USDX:

• Rate hikes → US interest rates become more attractive → global capital flows into the US → USD appreciates, index rises
• Rate cuts → US interest rates less attractive → capital flows out → USD depreciates, index falls

That’s why every Fed rate decision makes markets nervous, fearing unexpected USDX swings.

US economic data—long-term trend reflection

Employment figures, CPI inflation, GDP growth:

• Strong data → US economy robust → USD strengthens
• Weak data → economic outlook uncertain → market confidence drops, USD weakens

Geopolitical and international events—risk aversion triggers

Wars, political turmoil, regional conflicts, and uncertainties cause markets to flock to “safe assets,” with USD often being the first choice. In other words, “The more chaotic, the stronger the dollar”—though it sounds counterintuitive, it reflects the market’s emphasis on USD as a safe haven.

Policies and performance of other major currencies

The USDX is a “relative value” of the dollar versus six currencies. When the euro, yen, etc., weaken due to economic slowdown, loose monetary policy, or political instability, the USDX can rise even if the dollar itself isn’t appreciating.

Simply put: When other currencies fall, the USDX appears stronger.

“US Dollar Index” vs. “Trade-Weighted US Dollar Index”: which is the real indicator?

Investors usually look at the “US Dollar Index” (DXY), but the Fed more often references the “Trade-Weighted US Dollar Index.” What’s the difference?

USDX (USDX)

• Most common, most reported by media
• Tracks only six major currencies
• Created by ICE (Intercontinental Exchange)
• Euro has the highest weight (57.6%), so the index has a Euro-centric perspective

Trade-Weighted US Dollar Index

• The Fed’s preferred indicator
• Weighted based on actual US trade partners
• Includes over 20 currencies, covering Asian emerging markets (RMB, Korean won, TWD, Baht, etc.)
• More accurately reflects the exchange rate movements of the US’s real trading partners, better representing current global market conditions

Practical advice:

• General investors can monitor the “US Dollar Index” for quick market sentiment
• Those engaged in macro research, forex trading, or wanting to understand Fed policies deeply should also consider the “Trade-Weighted Index” as a supplementary reference

Summary of key points

Three main applications of the US Dollar Index:

1. Assessing global capital flows: rising index = capital flows into the US; falling index = capital moves to emerging markets
2. Forecasting exchange rates and asset values: USD appreciation boosts USD assets but depresses emerging market assets
3. Evaluating economic policy effects: Fed’s rate decisions and economic data are reflected in the USDX

Whether you invest in US stocks, gold, Taiwan stocks, or hold multiple currencies, keeping an eye on USDX trends is essential for optimizing asset allocation and risk management. It’s especially critical in forex trading—USDX isn’t just a reference, but a key variable influencing your trading success.

Regularly observe the USDX, combine it with Fed policy changes and global economic events, and you’ll be better positioned to seize investment opportunities and maintain an advantage in the complex global financial landscape.