US Dollar Index (DXY): A measure of global strength and the difference between the euro and the dollar

Introduction to the Role of the Dollar in Global Markets

In the world of finance and investment, the impact of the US dollar on all global assets cannot be ignored. From oil and gold to stocks and foreign currencies, everything is connected in one way or another to the strength of the dollar. When the dollar rises, demand for dollar-denominated goods decreases, forex trading trends change dramatically, and the effects may be positive or negative on global stock markets. Conversely, when the dollar weakens, liquidity is attracted toward higher-risk assets and alternative currencies. For this reason, understanding the (DXY) Dollar Index is essential for anyone seeking to understand the dynamics of the global financial market.

What is the Dollar Index?

The US Dollar Index is a comprehensive measure reflecting the relative strength of the dollar against a basket of six major foreign currencies. This index is used as a reliable tool to evaluate the performance of the dollar in global markets, especially in relation to the United States’ main trading partners.

Abbreviation: The index is denoted as DXY and its movements can be tracked directly through various trading platforms.

Simple reading of the index: When the index rises, it indicates that the dollar is moving higher against other currencies, while a decline suggests relative weakness of the dollar. This movement directly affects US import and export prices and investor expectations about the US economy.

Historical Development of the Dollar Index

Start in 1973: The dollar index was launched in 1973, shortly after the collapse of the Bretton Woods system that linked global currencies to the gold-backed dollar. It was created to provide an accurate and reliable tool for monitoring the dollar’s value worldwide, especially after abandoning the gold standard.

Base value: The index started with a base value of 100 points, which became the reference point for all subsequent movements.

Major updates: The index has undergone several updates over decades, most notably in 1999 when the euro was added to replace several previous European currencies such as the German mark and French franc. This update enhanced the index’s ability to accurately represent the current economic reality.

Summary of historical performance:

Components of the Dollar Index: Euro vs. Other Currencies

The index comprises six major currencies, each with a relative weight that determines its impact on the overall value:

Difference between Euro and dollar in the index: The euro accounts for over half of the index’s weight, meaning EUR/USD movements are the main driver of the DXY. When the dollar rises against the euro, it significantly impacts the overall index. Similarly, the euro, yen, and pound together make up over 80% of the index, so these three currencies largely determine the overall trend.

Calculation Formula and Mathematical Equation

The weighted geometric mean is used to calculate the dollar index value:

USDX = 50.14348112 × EURUSD^-0.576 × USDJPY^0.136 × GBPUSD^-0.119 × USDCAD^0.091 × USDSEK^0.042 × USDCHF^0.036

Explanation of the formula:

• The exponents represent the weights of each currency
• Currency pairs where the dollar is the base currency increase the index when the dollar appreciates
• Pairs where the dollar is the quote currency decrease the index when the dollar depreciates
• The constant 50.14348112 normalizes the index to a base value of 100

Interpreting and Understanding Index Numbers

The dollar index can be understood through the following points:

Index above 100: Indicates relative strength of the dollar against a basket of currencies. For example, at 110 points, the dollar is trading about 10% above the base value.

Index below 100: Indicates relative weakness of the dollar. At 90 points, the dollar is roughly 10% weaker than the reference point.

Level 100 as a balance point: This is the neutral level that helps analysts understand the trend without examining each currency pair separately.

Economic Factors Moving the Index

1. Monetary policy and interest rates

Decisions by the Federal Reserve have a direct and strong impact on the index. When the Fed raises interest rates, it attracts foreign capital due to higher yields on dollar-denominated assets, boosting the index. Conversely, accommodative policies put downward pressure on the index.

Practical example: In November 2025, when Fed officials indicated a lower likelihood of rapid rate cuts, the index rose to about 99.8 points.

2. US economic data

Strong economic figures push the index higher, while weak data pull it down. Key data include:

• GDP and growth rate
• Employment and unemployment figures
• Consumer spending indicators

Practical case: When the US announced a 3.8% GDP growth for Q2 2025, it supported dollar strength and the index.

3. Inflation rates and expectations

Inflation influences market expectations regarding future rate decisions. Rising inflation typically prompts the Fed to tighten policy, temporarily strengthening the dollar. Falling inflation reduces the likelihood of rate hikes, putting downward pressure on the index.

Note: In April 2025, the index hit a three-year low around 98.15 amid rising concerns over trade policies.

4. Geopolitical events and safe havens

During times of global uncertainty, demand for the dollar as a safe haven increases, raising the index. For example, in March 2020 during the COVID-19 crisis, the index rose to 102.99 amid capital flows into the dollar.

5. Market sentiment and capital movements

Investor confidence directly impacts the index. In 2025, the dollar experienced a sharp decline of about 9% due to waning market sentiment and concerns over economic policies.

Impact of the Index on Markets and Different Assets

Effect on stock markets

Rising index often negatively affects multinational company stocks because their exports become less competitive. Conversely, a declining index can boost profits for these companies.

Effect on commodities, oil, and gold

Commodities, oil, and gold are priced in dollars. When the index rises, these commodities become more expensive for foreign buyers, potentially reducing demand and prices. A falling index makes commodities cheaper, boosting demand and prices.

Effect on foreign exchange markets

All major forex pairs are affected by index movements. A rising index strengthens the dollar against euro, yen, and pound, while a decline weakens the dollar against these currencies.

Effect on bonds and international financing

Countries and companies with dollar-denominated debt are affected by index movements. A rising index increases borrowing costs, while a decline makes debt management easier.

Investing and Trading the Dollar Index

Profit opportunities from the index

Investing in the dollar index offers the chance to profit from its movements in both directions. Gains can be made from dollar appreciation on strong economic data or tightening policies. The index provides a unified way to track dollar strength without monitoring multiple pairs.

Using the index for hedging and protection

Currency risk hedging: The index can be used to hedge against dollar fluctuations, especially for portfolios holding dollar-denominated assets.

Protection of international assets: Investors with foreign currency holdings can use the index as a tool to hedge against sudden dollar appreciation.

Diversification and risk reduction: Adding the index to a portfolio provides diversification across assets, reducing reliance on a single instrument.

Different investment methods

CFDs (CFDs): Allow trading on both rising and falling index with leverage, suitable for short-term traders but with higher risks.

Futures (Futures): For professional traders and long-term investments, offering direct exposure in official markets.

ETFs (ETFs): A safe option for long-term investing, suitable for conservative investors without intensive daily monitoring.

Basic trading strategies

Trading with the main trend: Identify the overall trend on higher timeframes, then look for suitable entry points. In an uptrend, buy on dips; in a downtrend, sell on rallies.

Trading around economic events: The index moves strongly during key data releases. The strategy relies on analyzing expectations before the release and quick entries after surprises.

Targeting momentum and overbought levels: In strong momentum cases, stay with the movement. In overbought situations, target short-term reversals.

Critical economic data to monitor

Federal Reserve rate decisions: Any direct change has an immediate and strong impact.

Non-farm payrolls (NFP): Reflects labor market health and overall economy.

Inflation indicators (CPI and PCE): Set market expectations for future rate decisions.

GDP: The comprehensive indicator of US economic strength.

Technical analysis tools

Moving averages (MA): To identify overall trend and strength.

Relative Strength Index (RSI): To detect overbought or oversold conditions.

MACD indicator: To understand market momentum and potential turning points.

Support and resistance levels: To pinpoint precise entry and exit points.

Japanese candlesticks: To read price patterns and reversals.

Risks and Challenges

Despite the benefits of investing in the dollar index, several risks should be considered:

Rapid volatility: The index can experience sharp movements due to unexpected economic data or rate decisions.

Impact of geopolitical events: Crises or global tensions may cause unpredictable fluctuations.

Limited currency coverage: The index does not include emerging market currencies, which may leave gaps in analysis.

Heavy reliance on US economy: The index strongly reflects US economic performance, making it sensitive to domestic developments.

Conclusion

The dollar index is a fundamental tool for understanding the dynamics of the global financial markets. By monitoring its movements, traders and investors can clearly read the dollar’s trends and understand its impact on stocks, commodities, and other currencies. Whether used for short-term speculation or long-term hedging, understanding its mechanisms and the factors that influence it is essential for the success of your investment strategy.

The difference between the euro and the dollar in the index is clear: the euro holds the largest share (57.60%), meaning EUR/USD is the main driver of the DXY. This reflects the importance of US-Eurozone trade in the global economy. However, the influence of other currencies like the yen, pound, Canadian dollar, and others should not be overlooked, as collectively they shape the overall picture of dollar strength.

Investing in the dollar index requires a deep understanding of economic factors, disciplined risk management, and a clear, predefined strategy. With this solid foundation, traders and investors can capitalize on real opportunities in currency markets and other assets.