Understanding the Power of the Dollar: Key Global Indicators and Their Impact on Financial Markets

Introduction: Why Do Traders Care About the US Dollar Movement?

In global markets, rarely does a stock, commodity, or currency move independently of the US dollar. When its value rises, commodity prices denominated in it tend to fall, and forex trading patterns shift. When it weakens, liquidity is redistributed toward higher-yield assets. This complex relationship makes the (DXY) US Dollar Index a fundamental tool for any trader or investor seeking to read the market accurately.

The dollar index serves as a comprehensive measure of the US currency’s performance against a basket of other major currencies. By monitoring this index, traders can understand the overall trend of the dollar and its impact on stocks, commodities, and other currencies.

What Exactly Is the Dollar Index?

The dollar index is a measurement tool that reflects the strength of the US dollar against a basket of six major foreign currencies. It is used to evaluate the dollar’s performance within the global economic context and international trade. The index includes currencies of the US’s key trading partners, making it a reliable reference for understanding the dollar’s purchasing power and its influence on international investments.

Abbreviation: DXY

When this index rises, it indicates that the dollar has become relatively stronger against other currencies, negatively affecting the competitiveness of US exports. Conversely, when it falls, the dollar weakens, making US products cheaper and more attractive in global markets.

Origin and Historical Development

The dollar index was launched in 1973, immediately after the collapse of the Bretton Woods system. This system linked global currencies to the US dollar backed by gold. With the abandonment of gold, there was a need for an accurate tool to track the dollar’s value in international markets.

The index started with a base value of 100. It has undergone several updates over the decades, most notably in 1999, when the euro was added to replace several European currencies like the German mark and French franc.

Key historical milestones:

• 1973: Launch at 100 points
• 1973-1984: Decline below 90 due to inflation and oil crises
• 1985: Reached a historic peak near 160 due to monetary tightening
• 1985-1987: Sharp decline below 90 after the Plaza Accord
• 2002-2008: Levels close to 70 during the financial crisis
• 2014-2017: Recovery between 95-100
• 2020-2021: Fluctuated between 89-93 during the COVID-19 pandemic
• 2022: Jumped to 110 amid tightening monetary policy
• 2023-2024: Gradual decline between 101-108
• 2025: Sharp drop of about 9% to 96 points

How Is the Index Calculated?

The dollar index is calculated using a weighted geometric average of the exchange rates of the dollar against six foreign currencies. Each currency has a specific relative weight reflecting its economic and trade importance.

Composition of the basket and currency weights:

Note: The euro, yen, and pound together account for over 80% of the index, so their movements largely determine the overall trend.

Calculation formula:

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

The positive and negative exponents reflect the weights of the currencies in the basket. When the dollar is the base currency in a pair, a rising dollar increases the index. When the counter currency is involved, a falling dollar decreases the index value.

Interpreting the Numbers: What Do Different Values Mean?

The index can be seen as a thermometer of dollar strength:

• Above 100: Indicates relative strength of the dollar
• Below 100: Indicates relative weakness
• At 110: Means the dollar is trading 10% above the base value
• At 90: Means the dollar is trading 10% below the base value

When the index rises to 110, it signals strong dollar strength against the basket of currencies. Conversely, a drop to 90 indicates weakness.

Main Driving Factors

The dollar index does not move randomly. Several specific factors influence its direction:

1. US interest rate decisions

Federal Reserve decisions directly impact the index. When the Fed raises interest rates, it attracts foreign capital into dollar-denominated assets, strengthening the dollar. When rates are cut or a dovish policy is adopted, demand for the dollar and the index tend to decline.

In November 2025, the index rose to 99.8 after Fed officials’ statements reduced the likelihood of a quick rate cut.

2. US economic data

Strong economic figures boost the dollar. Indicators like GDP, employment, and consumer spending provide signals about economic health. When growth exceeds expectations, demand for the dollar increases.

In Q2 2025, data showing 3.8% growth supported the dollar index in subsequent trading sessions.

3. Inflation and monetary expectations

Inflation rates influence market expectations regarding interest rates. Rising inflation may prompt the Fed to hike rates, supporting the dollar short-term. Falling inflation reduces the likelihood of rate hikes, weakening the index.

In April 2025, the index hit a three-year low of (98.15 points) amid concerns over trade policies and economic uncertainties.

4. Geopolitical events and safe-haven demand

During times of global uncertainty, investors turn to the dollar as a relatively safe haven, boosting the index. In March 2020, during the initial COVID-19 pandemic crisis, the index rose to 102.99 with capital flowing into the dollar.

5. Market sentiment and capital flows

Optimism or pessimism about the US economy reflects on the dollar. In 2025, the dollar experienced a sharp decline of about 9%, its worst performance in over 50 years, due to declining investor confidence and economic policy concerns.

Remember: The index rarely moves due to a single factor. Usually, multiple factors interact simultaneously.

Impact of the Index on Global Markets and Different Assets

Effect on international trade

A rising dollar makes US exports more expensive and less competitive globally. US imports become relatively cheaper. This dynamic affects multinational company profits and economies linked to US trade.

Effect on stocks

When the dollar index rises, it often pressures multinational companies’ profits because their exports become less attractive. When it falls, these companies’ earnings may increase, boosting stock market performance.

Effect on bonds

A rising dollar increases borrowing costs for countries and companies with dollar-denominated debt. A decline makes these debts more manageable.

Effect on commodities

Oil, gold, and other commodities priced in dollars become more expensive for buyers outside the US when the index rises, potentially reducing demand and lowering prices. When the index falls, commodities become cheaper, and prices may rise.

Effect on the forex market

The dollar forms the basis of most forex pairs. When the index rises, the dollar strengthens against the euro, yen, pound, and other currencies. When it falls, it weakens against them.

Important note: The relationship between the index and other assets is not always fixed, but it tends to become clear during periods of economic tension.

Why Do Traders Trade the Dollar Index?

Investment opportunities

Trading the index allows traders to benefit from dollar movements against multiple currencies without monitoring each pair individually. Profits can be made from both upward and downward movements of the index.

When the dollar rises due to strong economic data or hawkish interest policies, traders with long positions benefit from this rise.

Using the index for hedging (Hedging)

The dollar index can be used as a defensive tool in a portfolio:

• Currency risk protection: Especially if the portfolio contains dollar-denominated assets
• Protection of other assets: A declining dollar usually raises prices of dollar-priced commodities
• Diversification and risk reduction: Adding index-linked instruments provides effective diversification

Ways to Trade the Dollar Index

1. CFDs (CFDs)

Allow trading on the index’s rise or fall without owning the underlying asset. Suitable for short-term traders. Offer leverage and the opportunity to profit in both directions, but with higher risks.

2. Futures (Futures)

Trade the index via futures markets. Suitable for professional traders and long-term investments. Provide direct exposure in official markets.

3. ETFs (ETFs)

Buy units in funds that track the index’s performance. Suitable for long-term investments and risk reduction without daily monitoring.

Basic Trading Strategies

Trend Following

Identify the main trend of the index on higher timeframes, then enter trades aligned with this trend.

• In an uptrend: look for buying opportunities on dips
• In a downtrend: focus on selling opportunities on rebounds

Suitable for traders who prefer fewer but more stable trades.

Trading Around Economic Events

The index moves strongly during the release of key US data. It relies on:

• Analyzing expectations before the announcement
• Monitoring actual reactions
• Quick entry to capitalize on momentum

Requires fast execution and disciplined risk management.

Trading at Overbought/Oversold Levels

Identify situations where the index is overextended:

• During strong momentum: trade with the movement until clear weakness appears
• During saturation: target short-term reversals

Suitable for day traders.

Key Economic Data to Watch

When trading the dollar index, monitor:

• Interest rate decisions: Any change directly impacts dollar strength
• Employment data: A strong indicator of economic health
• Inflation indicators (CPI/PCE): Rising inflation prompts Fed tightening
• GDP: Reflects overall economic strength

Technical Analysis Tools

• Moving averages: To identify overall trend
• RSI (RSI): To identify overbought and oversold conditions
• MACD (MACD): To understand momentum and turning points
• Support and resistance levels: To determine entry and exit points
• Japanese candlesticks: To analyze price patterns

Summary

The dollar index is more than just a number — it’s a mirror of the US economy’s condition and global liquidity trends. Understanding its movements gives traders a real advantage, whether seeking trading opportunities or protecting portfolios during volatility.

With multiple factors influencing the index and broad impacts on global markets, regular monitoring and precise analysis remain essential for any serious trader aiming to use this tool effectively.