Does the rise and fall of the US Dollar Index directly affect your investment returns? Understand the operating logic of USDX in this article

Many people browse financial news every day and often see expressions like “US Dollar Index rising” or “US Dollar Index weakening.” But honestly, what does this thing have to do with us ordinary investors? Today, let’s break down the logic behind this mysterious indicator.

What exactly is the US Dollar Index (USDX)?

Simply put, the US Dollar Index is like a “health monitor” for the dollar, telling you with a number: how strong or weak the dollar is relative to other currencies globally.

Specifically, the US Dollar Index tracks the overall exchange rate changes of the dollar against six major international currencies (Euro, Yen, Pound Sterling, Canadian Dollar, Swedish Krona, Swiss Franc). These six currencies are chosen because they represent the world’s most active trading partners and economies.

The USDX is calculated using a weighted geometric mean, with a base value set at 100. This means:

• Index > 100: the dollar has appreciated since the base period
• Index < 100: the dollar has depreciated since the base period

For example, if the index drops from 100 to 76, it indicates the dollar has depreciated by 23%; conversely, rising from 100 to 176 means it has appreciated by 76%.

What happens in the world when the dollar appreciates vs. when it depreciates?

World of dollar appreciation

When the US Dollar Index rises, it means the dollar is worth more compared to other currencies. The most direct consequences are:

• Goods priced in dollars become cheaper—international commodities like crude oil, gold, agricultural products, all priced in dollars, will see their prices pressured downward. Global funds flow into the US because the dollar is stronger. US domestic exports become less competitive because US goods cost more in foreign currencies.

World of dollar depreciation

A falling dollar index indicates the dollar is relatively weaker, and investor confidence in the dollar diminishes. Funds start to withdraw from dollar assets and flow into other markets and assets. Non-dollar assets become more attractive—gold, emerging market stocks, cryptocurrencies, etc., become more active. US exporters benefit because US goods become cheaper.

How does the US Dollar Index influence your investment portfolio?

The “see-saw” relationship between the US Dollar Index and gold

Gold and the dollar usually move inversely. Why? Because gold is quoted in dollars:

• Strong dollar → higher cost to buy gold → demand drops → gold prices fall
• Weak dollar → lower cost to buy gold → demand rises → gold prices increase

Of course, gold prices are also affected by war, inflation, geopolitical issues, but the USDX is definitely one of the core driving forces.

The complex relationship between the US Dollar Index and US stocks

This relationship is quite nuanced, not simply positive or negative correlation:

Sometimes, dollar appreciation attracts funds into the US, and US stocks rise along with it. But if the dollar rises too sharply, it can hurt US export companies’ competitiveness, dragging down the overall stock market.

Historical example: During the global stock market crash in March 2020, the USDX surged to 103 due to safe-haven demand. But then the Federal Reserve flooded the market with liquidity, and the dollar quickly weakened again, dropping back to 93.78. During this period, US stocks first fell then rose, and there was no simple one-to-one relationship between the dollar and US stocks.

The “inverse dance” between the US Dollar Index and commodities

Crude oil, base metals, agricultural products—all priced and settled in dollars. When the dollar appreciates → commodities priced in dollars become cheaper → demand weakens. Conversely, when the dollar weakens, commodity prices tend to rise. This is why many commodity bull markets are accompanied by a dollar bear market.

What factors drive changes in the US Dollar Index?

The Federal Reserve’s interest rate policies—most direct trigger

This is almost the most sensitive trigger for USDX:

• Fed raises interest rates → higher US interest rates → global funds flock to the US for higher yields → dollar appreciates
• Fed cuts interest rates → US dollar attractiveness declines → funds flow out → dollar depreciates

Before and after each Fed decision meeting, the USDX often experiences sharp fluctuations. The market tends to price in (anticipate) the Fed’s policy expectations in advance.

US economic data

Data like Non-Farm Payrolls, unemployment rate, CPI, GDP directly reflect the US economic fundamentals:

• Strong data → investor confidence in the US economy → dollar strengthens
• Weak data → confidence wanes → dollar weakens

These data are released monthly, and each release can trigger short-term volatility in the USDX.

Geopolitical events and risk sentiment

Wars, political turmoil, financial crises—unexpected events—can trigger global risk aversion. At such times, the dollar, as the safest reserve asset, is often heavily bought, pushing the USDX higher. So sometimes, the logic of “the more chaotic, the more dollar buying” holds.

Other currencies’ own movements

This is often overlooked. The USDX is a relative measure of the dollar versus six currencies. Even if there is no news about the dollar itself, if the euro weakens due to European recession, or the yen weakens due to Japanese monetary easing, the USDX will passively rise.

In other words: When other currencies depreciate, it also makes the dollar index look stronger.

Practical tips for traders regarding the US Dollar Index

1. For those holding dollar assets: Pay attention to USDX trends. When the index rises, dollar assets increase in value (measured in other currencies); when it falls, they depreciate.

2. For commodity traders: Since commodities tend to move inversely to the dollar, monitor key support and resistance levels during dollar strength or weakness.

3. For international investors: An increasing USDX may signal pressure on non-dollar assets (including emerging markets). Prepare risk management strategies in advance.

4. For forex traders: The USDX is closely related to individual currency pairs; its direction often indicates the overall trend of the dollar basket.

In summary, the US Dollar Index is a barometer of the global financial market, reflecting the dollar’s relative strength and influencing gold, crude oil, US stocks, emerging markets, and more. Whether you’re a stock investor, forex trader, or commodity trader, understanding how the USDX works can help you better grasp market rhythms.