What does a higher US dollar index mean? The global investors' must-know currency market indicator

If you are involved in forex trading or follow international markets, you probably often hear phrases like “the US Dollar Index has risen again” or “the dollar is appreciating.” But what exactly is the US Dollar Index? Why do its fluctuations influence gold, US stocks, and even Taiwan stocks? Today, we’ll help you understand this most important indicator in the global financial markets from a trader’s perspective.

What does a higher US Dollar Index mean?

US Dollar Index (USDX or DXY) is not an index from any specific exchange, but a benchmark that measures the strength of the US dollar relative to other major currencies. Simply put, it tracks the exchange rate changes of the US dollar against six major international currencies.

These six currencies are:

• Euro (EUR): highest weight, 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%

Imagine the US Dollar Index as a global financial market thermometer. A higher index indicates a stronger dollar in the international arena, and vice versa.

Market signals behind the rise and fall of the US Dollar Index

Market reactions when the US Dollar Index rises

When the dollar index surges, it signifies the dollar is appreciating, while other major currencies (like the euro and yen) are depreciating. During this phase:

• Dollar assets attract global capital: Investors tend to buy US Treasuries, US stocks, and other dollar-denominated assets because returns in USD are more attractive
• Commodities face downward pressure: Gold, crude oil, and other international commodities are usually priced in USD; a stronger dollar raises the purchase costs for non-USD users, dampening demand
• Export-driven economies come under pressure: Export-oriented economies like Taiwan and South Korea see reduced competitiveness in US markets, impacting corporate profits
• Emerging markets face capital outflows: As USD assets become more attractive, hot money flows out of Asia, Latin America, and other emerging markets

Market behavior when the US Dollar Index declines

When the dollar weakens, global investors’ risk appetite generally increases:

• Capital flows into emerging markets: Investors are willing to take more risks, shifting into Asian stocks, cryptocurrencies, and high-growth markets
• Commodities rise: Gold, oil, and other non-USD assets become relatively cheaper, boosting demand
• Export companies benefit: TWD appreciates, boosting manufacturing competitiveness, creating a favorable environment for Taiwanese exporters
• Exchange rate risks emerge: If you hold USD assets, a decline in the dollar means less value when converted back to your local currency

How is the US Dollar Index calculated?

The US Dollar Index uses a “geometric weighted average” method. In simple terms, it’s not a simple average of the six currencies, but a weighted measure based on each country’s economic size, trade volume, and currency influence.

Key point: The US Dollar Index is a relative indicator, not an absolute price. Using 1985 as the base period (base value = 100):

• Index = 100: US dollar is at the base level, no appreciation or depreciation
• Index = 120: dollar has appreciated by 20% since the base period
• Index = 80: dollar has depreciated by 20% since the base period

Therefore, a higher US Dollar Index indicates a stronger purchasing power of the dollar in the international market, while a lower index reflects a weaker dollar.

How does the US Dollar Index affect global assets?

Relationship between US stocks and the dollar index

The correlation between the dollar and US stocks is not fixed:

• Interest rate hike cycle: Federal Reserve raises interest rates → dollar attractiveness increases → US stocks often rise as capital flows into the US
• When the dollar becomes too strong: It can hurt US export competitiveness, drag down corporate earnings expectations, and suppress stock prices
• Historical example: In March 2020, during the global pandemic outbreak, stock markets plummeted but the dollar index surged to 103; later, the Fed flooded the market with liquidity, and the dollar quickly softened to 93.78

Conclusion: The trend of US stocks and the dollar depends on the overall economic context, not just a single factor.

Inverse relationship between gold and the US Dollar Index

Gold and the dollar usually have a “see-saw” relationship:

• Dollar appreciation → Cost of buying gold in USD rises → Demand for gold declines → Gold prices fall
• Dollar depreciation → Gold becomes cheaper to buy → Gold’s attractiveness increases → Gold prices rise

However, gold prices are also influenced by inflation, geopolitical conflicts, real interest rates, and other factors, so it’s not enough to look at the dollar index alone.

Taiwan stocks and the New Taiwan Dollar (NTD)

The US Dollar Index has a direct impact on Taiwan’s market:

• Dollar appreciation (index rising): Capital flows back to the US → TWD depreciates → Foreign investors sell Taiwan stocks at high prices → Taiwan stocks face downward pressure
• Dollar depreciation (index falling): Capital flows into Asia → TWD appreciates → Foreign investors continue buying → Taiwan stocks benefit

But there are exceptions. In a “risk-on” environment where overall risk assets rise, US stocks, Taiwan stocks, and the dollar can all go up simultaneously; during “black swan” events, all assets may decline together.

What drives changes in the US Dollar Index?

The Federal Reserve’s policies are the most direct and effective

The Fed’s interest rate decisions are arguably the most direct influence on the dollar index:

• Rate hikes: Increase dollar attractiveness → Capital flows into the US → Dollar Index rises
• Rate cuts: Reduce dollar appeal → Capital flows out of the US → Dollar Index falls

Every Fed meeting attracts market attention on interest rate decisions, as they directly impact dollar liquidity and attractiveness.

US economic data signals

Employment figures (non-farm payrolls, unemployment rate), CPI inflation data, GDP growth rates, and other indicators influence market confidence in the US economy:

• Strong data → Optimistic economic outlook → Dollar appreciates
• Weak data → Pessimistic outlook → Dollar depreciates

Geopolitical risks and risk aversion

Wars, political crises, regional conflicts, and global instability trigger safe-haven buying. The dollar, with its liquidity and global acceptance, is often the first choice for safe-haven assets. Sometimes, “chaos” actually leads to dollar appreciation, following this logic.

Performance of other major currencies

Since the dollar index is a relative measure, when the euro and yen weaken due to their own economic issues or loose policies, even if the dollar itself doesn’t appreciate, the dollar index can rise.

US Dollar Index vs Trade-Weighted US Dollar Index

There are two common indicators of dollar strength in the market:

US Dollar Index (DXY)

• The most common and widely reported version
• Created by ICE (Intercontinental Exchange)
• Tracks the dollar against six currencies
• Euro weight is 57.6%, reflecting a Euro-centric perspective

Trade-Weighted US Dollar Index

• The Federal Reserve’s preferred measure
• Includes over 20 currencies, covering Asian emerging markets (CNY, TWD, KRW, THB, etc.)
• More accurately reflects the actual trade partners’ exchange rate movements
• Better suited for understanding the current global market ecosystem

Most investors only need to watch the DXY, but for macroeconomic research or forex trading, the trade-weighted index offers deeper insights.

Investment strategies when the US Dollar Index is high

Understanding the dollar index’s movements can help inform your investment strategies:

• Holding USD assets: When the index rises, these assets increase in value when converted to your local currency
• Timing gold investments: When the dollar index hits historical highs, gold is often at a low point, and vice versa
• Global equity allocation: When the dollar appreciates, emerging market stocks are relatively cheaper; when it depreciates, it can boost global risk assets
• Forex trading: The strength or weakness of the dollar index directly creates trading opportunities

Conclusion

The US Dollar Index is like a compass for the global financial markets. Every fluctuation triggers chain reactions across gold, crude oil, stocks, and forex markets. A higher dollar index signifies a stronger dollar on the world stage, which has profound effects on global capital flows.

Whether you are a long-term investor, forex trader, or a retail investor simply trying to understand market trends, learning to interpret the dollar index is essential for gaining an edge in your investments.