The Secret Behind the Decades of US Dollar Index Trends: A Must-Know Global Financial Indicator for Investors

When you are tracking your investment portfolio, do you often see financial media mention “the dollar’s rally is strong” or “the dollar is under pressure and declining”? These expressions reflect one of the most important reference indicators in the global financial markets—the US Dollar Index (USDX/DXY).

Over the past decade, the US Dollar Index has experienced multiple sharp fluctuations, each influencing global asset allocations from stocks and gold to forex markets. Understanding the logic behind this indicator is equivalent to mastering the code of global capital flows.

What exactly does the US Dollar Index measure?

The US Dollar Index is not the price of a specific stock or commodity; it is a relative strength indicator. It tracks the exchange rate changes of the US dollar against six major international currencies to reflect the dollar’s position in the global financial market.

These six currencies are:

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

Since the Eurozone covers 19 countries and Japan is the world’s third-largest economy, this weight allocation ensures that the US Dollar Index can truly reflect changes in the global economic landscape. In other words, the USDX is like a “global economic thermometer.”

Key moments of the decade-long fluctuations of the US Dollar Index

From 2014 to 2024, the US Dollar Index has gone through five distinct cycle changes:

2014-2015 Appreciation Phase: The Federal Reserve began a rate hike cycle, pushing the dollar index from 95 to 103, attracting global capital inflows into the US.

2016-2017 Consolidation Period: Brexit and geopolitical uncertainties caused the dollar index to fluctuate between 95-105.

2018-2019 High Level Period: The dollar index reached 97-99, but as the Fed shifted to a dovish stance, the index started to weaken.

March 2020 Shock: The pandemic triggered global panic, and the dollar surged to 103 due to safe-haven demand, hitting a decade high. Subsequently, the Fed injected massive liquidity, and the dollar quickly weakened back to 93.78.

2021-2023 Resurgence: The Fed actively raised interest rates to combat inflation, strengthening the dollar index above 105.

2024 New Trend: The dollar index hovers around 100, reflecting market reassessment of Fed policies.

This ten-year trend teaches us an unchanging truth: Federal Reserve policies are the most direct drivers of the US Dollar Index.

Chain reactions of dollar appreciation and depreciation on global assets

Market performance when the dollar appreciates

When the dollar index rises (e.g., from 95 to 100), it means the dollar is strengthening relative to other currencies. This triggers a series of chain reactions:

Impact on commodity markets: Commodities priced in dollars like crude oil, gold, and copper become relatively more expensive. Demand drops, and prices tend to fall. The “ping-pong” effect between gold and the dollar is most evident—each 1% rise in the dollar typically causes gold prices to fall by 0.5%-1%.

Dual impact on stocks: A rising dollar indicates a relatively strong US economy, which is short-term positive for US stocks. But if the appreciation is too large, it can hurt US multinational earnings (as foreign revenues converted back to dollars shrink), dragging down overall stock performance.

Impact on emerging markets: The most direct victims are emerging market countries burdened with dollar-denominated debt. Dollar appreciation increases debt repayment burdens. Meanwhile, capital tends to flow out of emerging markets into the US seeking higher yields. During this period, Taiwan stocks often face downward pressure.

Decisive influence on exchange rates: Asian currencies like the New Taiwan Dollar and the Chinese Yuan often depreciate with the dollar’s rise. A weaker TWD means higher import costs but can boost export competitiveness.

Investment opportunities when the dollar depreciates

Conversely, when the dollar index declines (e.g., from 100 to 95), market behavior is entirely different:

Gold’s rebound stage: A weaker dollar opens space for gold prices to rise. Investors tend to shift towards precious metals as a store of value.

Capital flows back into emerging markets: Investors no longer rely solely on dollar assets and start allocating to Asian stocks. Taiwan stocks often see buying interest during this period, and the TWD may appreciate.

Exchange rate gains: Investors holding US stocks or dollar assets should pay attention. A weaker dollar means your dollar-denominated assets convert to fewer local currency units—what is often called “currency loss.”

Attractiveness of emerging market bonds: A weaker dollar reduces debt burdens, lowers credit risk in emerging markets, and attracts global investors.

Four core factors driving the US Dollar Index

Federal Reserve policies are the absolute dominant factor

An interest rate hike cycle attracts global capital into the US seeking higher returns, causing the dollar to appreciate. Conversely, rate cuts lead to depreciation. Over the past decade, every Fed meeting has been a focal point because rate decisions can instantly change the dollar index trend.

US economic fundamentals speak

Employment data (especially Non-Farm Payrolls), CPI inflation, GDP growth—these economic indicators reflect the strength of the US real economy. Strong data boosts the dollar; weak data triggers sell-offs.

Geopolitical uncertainties drive safe-haven demand

When conflicts in Ukraine, tensions in the Middle East, or other black swan events occur, global capital tends to flock to the dollar as the safest asset. The logic of “buying dollars more as chaos increases” becomes apparent.

Relative performance of other major currencies

Since the USDX is a relative measure, when the European Central Bank adopts easing policies causing the euro to weaken, or Japan’s economy weakens leading to a weaker yen, the USDX can rise passively even if the dollar itself hasn’t appreciated.

US Dollar Index vs Trade-Weighted US Dollar Index: Which should investors watch?

There are two common measures of dollar strength in the financial markets, which can confuse investors:

US Dollar Index (DXY) is the most frequently cited version by media, published by ICE, covering only six major currencies. Its advantage is simplicity and quick judgment of overall dollar trend.

Trade-Weighted US Dollar Index is compiled by the Federal Reserve, covering over 20 currencies, including the Chinese Yuan, Korean Won, TWD, Thai Baht, and other Asian emerging market currencies. This version more accurately reflects the US’s actual trading partner structure and provides a more precise measure of US competitiveness in global markets.

For most investors, the DXY is sufficient for decision-making. But if you engage in forex trading or conduct in-depth macro analysis, the Trade-Weighted Index offers a more comprehensive perspective.

Mathematical logic behind the US Dollar Index calculation

The USDX uses a geometric weighted average method, with the core formula being: multiply the exchange rates of the dollar against each currency raised to their respective weights, then multiply by a fixed constant 50.14348112. This constant ensures that the base period (1985) equals 100.

In other words:

• USDX=100: baseline level, no change
• USDX=120: 20% appreciation relative to the base
• USDX=80: 20% depreciation relative to the base

This calculation method ensures that the USDX is relative and comparable—it is not an absolute price but always measured against the base period and other currencies.

What the past decade’s trend reveals to investors

The past ten years of USDX movements reveal an important pattern: The dollar’s strength/weakness cycles are highly synchronized with global liquidity cycles.

An easy monetary environment (low interest rates, central banks increasing money supply) tends to depress the dollar and boost stocks, gold, and emerging market assets. A tightening environment (rate hikes, balance sheet reduction) tends to lift the dollar and pressure other assets.

Understanding this pattern allows investors to anticipate asset allocation directions. When the Fed signals rate hikes, expect the dollar to strengthen, gold to come under pressure, and emerging markets to face sell-offs. The opposite is also true.

This is why tracking the USDX trend is an essential basic skill for investors aiming to precisely allocate assets in the global market.