What Does The US Dollar Index Measure?

What Does The US Dollar Index Measure?

The United States dollar is the pillar of the global economy. The importance of the currency cannot be understated. From oil markets to central banks reserves, USD has been the primary mode of exchange for decades. 

For this reason, monitoring the performance of the U.S dollar is paramount for investors to make necessary adjustments and adequately plan for future market performance. 

In the forex market, USD is part of all four major currency pairs and its purchasing power has an outsized effect on the market. 

Traders often refer to the U.S Dollar Index (USDX) to measure the strength of the currency. 

The index is composed of a basket of other important currencies and serves as a benchmark for the stability of the global forex market. 

If you are a beginner forex trader, learning more about the U,S Dollar Index can help you better understand market performance and make more informed decisions in the future. 

What Is The U.S Dollar Index?

The U.S. Dollar Index (USDX), often referred to simply as the "Dollar Index," is a widely followed financial benchmark that measures the value of the United States dollar (USD) relative to a basket of other major world currencies.

It provides a snapshot of the dollar's overall strength or weakness in the forex market. The index is maintained by the Intercontinental Exchange (ICE) and has been in use since its inception in 1973.

The USDX is designed to reflect changes in the value of the U.S. dollar against six major global currencies, with each currency assigned a specific weight within the index. The currencies included in the USDX and their respective weightings are as follows:

  • Euro (EUR) - 57.6%
  • 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%

These weights are based on the importance of these currencies in international trade and financial markets. The Euro has the largest weight because it is the most traded currency against the U.S. dollar.

The U.S. Dollar Index is calculated using exchange rate data from these six currencies. It is typically expressed as a numerical value, and changes in the index value reflect the relative strength or weakness of the U.S. dollar compared to the basket of currencies.

If the index value rises, it indicates that the U.S. dollar has strengthened against the basket of currencies, and if it falls, it suggests the U.S. dollar has weakened.

Why The U.S Dollar Index Matters

The USDX is a valuable tool for traders, investors, and policymakers to monitor the U.S. dollar's performance in the global currency market. 

It can be used to assess trends in the dollar's strength or weakness, make decisions regarding currency investments, and analyze the potential impact on international trade and financial markets.

Additionally, central banks and governments may use the index to help inform monetary and economic policy decisions.

Pros And Cons Of Using The Dollar Index In Forex Trading

Basing trading decisions on the U.S Dollar Index comes with a certain set of advantages and limitations. Considering these factors are essential in building a successful career on the forex market. 


  • Indicator of Dollar Strength: The Dollar Index provides a clear and widely recognized measure of the U.S. dollar's strength or weakness against a basket of major currencies. It offers a quick and convenient way to assess the overall health of the U.S. dollar in the forex market
  • Diversification: Forex traders often use a wide range of currency pairs in their trading strategies. The Dollar Index can help traders gain insights into the general direction of the U.S. dollar across multiple currency pairs, aiding in risk management and portfolio diversification
  • Risk Assessment: Traders and investors can use the Dollar Index to assess the level of risk associated with their forex positions. A strengthening U.S. dollar may signal higher risk for currency pairs where the dollar is the base currency, while a weakening dollar may indicate lower risk


  • Limited Currency Coverage: The Dollar Index focuses on a specific basket of currencies, primarily the euro, Japanese yen, British pound, Canadian dollar, Swedish krona, and Swiss franc. It does not include many other important currencies, such as emerging market currencies. Therefore, it provides a narrow view of the forex market
  • Euro Dominance: Given that the Euro has the largest weighting in the Dollar Index, changes in the euro's value have a significant impact on the index's overall performance. This can lead to situations where the Dollar Index may not accurately reflect the U.S. dollar's performance against a broader range of currencies
  • Inflexibility: The Dollar Index is based on a fixed basket of currencies and weights, which can lead to inflexibility in capturing changing market dynamics. It may not adapt quickly to evolving global economic conditions or shifts in forex market sentiment

Key Takeaways From What Does The US Dollar Index Measure

  • The Dollar Index is a benchmark of the USD that measures the performance of the currency against a basket of other currencies
  • Currencies included in the U.S dollar index are EUR, JPY, GBP, CAD, SEK, and CHF
  • The USDX is predominantly weighted in favor of the EUR, as it is the most exchanged currency against the dollar
  • The USDX primarily measures the health of the U.S dollar, which is the unofficial global reserve currency 

FAQs On What Does The US Dollar Index Measure

What is the U.S Dollar Index?

The U.S Dollar Index is a basket of currencies that measure the performance of the dollar against the EUR, JPY, GBP, CAD, SEK, and CHF.

How is the U.S Dollar Index weighted?

The currencies included in the USDX and their respective weightings are as follows:

  • Euro (EUR) - 57.6%
  • 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%

Is the U.S Dollar Index effective?

The USDX is a useful tool in measuring the strength of the U.S dollar, which is the most widely used and traded currency in the world.