Master the US Dollar Index fluctuations and understand the secrets of global capital flows

Is the US Dollar Index really that important? If you are investing in US stocks, gold, forex, or Taiwan stocks, the answer is yes. Many investors find that fluctuations in the US Dollar Index often determine market trends—sometimes even more critical than individual stock performance. So, what exactly does this mysterious index measure? Why does it have such a significant impact on global financial markets?

What is the US Dollar Index? A “Global Capital Temperature Gauge”

Many people are familiar with the “S&P 500” and “Dow Jones Industrial Average,” knowing they track a basket of stocks. The US Dollar Index (abbreviated as USDX or DXY) operates on a similar principle, but instead of stocks, it tracks the relative strength of the US dollar against six major currencies.

These six currencies are:

• Euro (EUR) — the heaviest weight, about 57%
• Japanese Yen (JPY)
• British Pound (GBP)
• Canadian Dollar (CAD)
• Swedish Krona (SEK)
• Swiss Franc (CHF)

In other words, the US Dollar Index is telling you: Is the dollar appreciating or depreciating relative to other major international currencies?

Think of the US Dollar Index as a “temperature gauge” for the global financial market. Since the dollar is the most widely circulated currency—used in commodity trade, energy, gold, and international investments—any change in its strength triggers chain reactions that ripple through global markets.

How Do Fluctuations in the US Dollar Index Affect Investors?

US Dollar Index Rising = US Dollar Appreciates, Capital Flows to the US

When the US Dollar Index rises, it indicates that the US dollar has strengthened against other currencies. What happens then?

Benefits for US investors and assets:

• Dollar-denominated commodities (like oil, gold) appear cheaper, increasing purchasing power
• Global “hot money” flows into the US—making US Treasuries, US stocks, and dollar assets more attractive
• US import costs decrease, benefiting domestic consumers

Impact on Taiwanese investors:

• Holding US stocks or dollar bonds, converting back to TWD yields higher value (FX gains)
• However, Taiwan’s export-driven economy faces pressure: goods become relatively more expensive, reducing export competitiveness and possibly dragging down corporate revenues
• The New Taiwan dollar tends to depreciate, making imports more expensive

US Dollar Index Falling = US Dollar Depreciates, Capital Flows to Emerging Markets

A decline in the US Dollar Index signifies a “weaker dollar,” increasing market risk appetite. Investors withdraw funds from the dollar and seek higher returns elsewhere.

Impact on Taiwan market:

• International hot money flows into Asia, potentially benefiting Taiwan stocks and pushing prices up
• The TWD tends to appreciate, making imports cheaper
• But if you hold dollar assets (US stocks, dollar deposits), beware of “FX losses”—a weaker dollar means converting back to TWD yields less

Quick summary:

• Strong dollar → Capital flows to the US → Taiwanese exporters face pressure, Taiwan stocks under stress
• Weak dollar → Capital flows into emerging markets → Beneficial for Taiwan stocks, TWD appreciates

What currencies compose the US Dollar Index? How are weights allocated?

The US Dollar Index appears to include only six currencies, but it actually represents a broader economic scope. The euro is issued jointly by 19 EU countries, and combined with the other five currencies, it covers over 24 developed countries. This is why the USDX holds such authority and influence in global finance.

The weights of these six currencies are not evenly distributed but are based on each economy’s size, trade volume, and currency influence:

Key observations:

• Euro accounts for over half of the index, meaning European economic conditions heavily influence the USDX. Major euro fluctuations directly impact the index.
• Japanese Yen is second, as Japan is the third-largest economy, with low interest rates and high liquidity, often serving as a safe-haven currency.
• The other four currencies combined account for less than 30%, but the Swiss Franc is known for stability and safety, making it a significant reference.

If you see the USDX fluctuate sharply, it’s often due to major news or movements in the euro or yen.

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

The USDX uses a “geometric weighted average” calculation. In simple terms:

• The constant 50.14348112 ensures the base period (1985) USDX = 100
• Inside the brackets are the exchange rates of the dollar against other currencies
• Each exchange rate is raised to the power of its weight (e.g., 57.6% weight for euro translates to a -0.576 exponent)

Important concept: The USDX is not an exchange rate or a price; it’s a relative index. It reflects the overall strength or weakness of the dollar since the base period.

Interpretation of values:

• 100 = baseline level, no change
• 76 = 24% decline from baseline, dollar has weakened
• 176 = 76% increase from baseline, dollar has strengthened

The higher the index, the stronger the dollar; the lower, the weaker it is on the international stage.

How does the US Dollar Index relate to your investment portfolio?

Relationship between USDX and Gold: The “Seesaw”

Gold and the dollar often move inversely:

• Dollar appreciation → Gold price drops (cost to buy gold in dollars rises, demand decreases)
• Dollar depreciation → Gold price rises (cost to buy gold in dollars falls, demand increases)

Of course, gold prices are also influenced by inflation, geopolitical tensions, oil prices, etc., so don’t rely solely on the USDX.

Relationship between USDX and US stocks: Complex, depends on context

The dollar and US stocks are not simply positively or negatively correlated:

• Sometimes a rising dollar leads to inflows into US markets → stocks rise
• Other times a strong dollar hampers US export competitiveness → stocks decline

For example, in 2020: during the March global market crash, the dollar surged to 103 due to safe-haven demand; later, as the US pandemic worsened and the Fed printed money aggressively, the dollar weakened to 93.78.

Conclusion: The relationship between US stocks and the dollar depends on specific economic conditions; it’s not a mechanical correlation.

Relationship between USDX and Taiwan stocks/TWD: Capital flows determine trends

• US dollar appreciation (index up) → Capital flows back to the US → TWD depreciates, Taiwan stocks face pressure
• US dollar depreciation (index down) → Capital flows into Asia → TWD appreciates, Taiwan stocks benefit

But there are exceptions. Sometimes, when the global economy improves, US stocks, Taiwan stocks, and the dollar can rise together; conversely, during black swan events, all assets may fall together.

What factors drive fluctuations in the US Dollar Index?

1. US Federal Reserve interest rate decisions (most direct impact)

• Rate hikes → US interest rates rise → Capital floods into the US → USD appreciates, index rises
• Rate cuts → Capital flows out of the US → USD depreciates, index falls

Every Fed decision announcement causes market jitters, as monetary policy is a key driver of USD volatility.

2. US economic data

Non-farm payrolls, unemployment rate, CPI inflation, GDP growth—these indicators directly reflect US economic health:

• Strong data → US economy performs well → USD strengthens
• Weak data → market confidence drops → USD softens

3. Geopolitical and international events

Wars, political turmoil, regional conflicts trigger risk aversion. During such times, the dollar often becomes the preferred safe-haven asset, leading to the counterintuitive phenomenon of “the more chaotic, the stronger the dollar.”

4. Performance of other major currencies

Since the USDX is a relative measure of the dollar against six currencies, if the euro, yen, or pound weaken due to economic weakness, loose policies, or political instability, the USDX can rise even if the dollar itself remains unchanged. Depreciation of other currencies makes the dollar appear stronger by comparison.

USDX vs. US Trade-Weighted Dollar Index: What investors need to know

Investors often see two similar-sounding indicators: “US Dollar Index” and “US Trade-Weighted Dollar Index.” What’s the difference?

US Dollar Index (DXY)

• The most common, widely reported version
• Includes only 6 currencies: euro, yen, pound, CAD, SEK, CHF
• Published by ICE (Intercontinental Exchange)
• The euro accounts for 57.6%, reflecting a Euro-American perspective

US Trade-Weighted Dollar Index

• The Fed’s preferred reference indicator
• Based on actual US trade partners, includes over 20 currencies
• Incorporates RMB, Mexican Peso, Korean Won, TWD, Thai Baht, and other emerging market currencies
• More accurately reflects the exchange rate changes with major US trading partners

Simple judgment: For most investors, the USDX is sufficient to gauge market sentiment. But if you do macro research, forex trading, or want to understand Fed policy more deeply, the trade-weighted index offers more precise insights.

Investment conclusion: Why should you pay attention to the US Dollar Index?

The USDX is a compass for global capital flows. It directly influences gold, oil, stocks, and all assets priced in dollars.

If you invest in US stocks, fluctuations in the USDX affect your FX gains/losses; if you hold Taiwanese stocks, the USDX determines whether hot money flows in or out; if you trade forex or gold, the USDX is a core reference.

By understanding the logic behind USDX movements and its drivers (Fed policies, economic data, geopolitical events, other currencies), you can better grasp the pulse of global markets and make more informed investment decisions.

The transparency and broad coverage of the USDX make it an important barometer of global economic health. In this interconnected global financial market, ignoring the USDX is like driving without a rearview mirror—you’ll eventually pay the price.