In-depth analysis of the USD index fluctuations: How USDX influences the global investment market

In the financial markets, the US Dollar Index is frequently mentioned, but many investors still have a vague understanding of how it operates and its actual impact. As an important indicator of the US dollar’s international competitiveness, every fluctuation of the US Dollar Index can reshape investors’ return expectations.

What exactly does the USDX measure

The US Dollar Index (USDX, also known as the DXY) is essentially a relative value system. Similar to how the S&P 500 tracks a basket of stocks in the stock market, the US Dollar Index tracks the overall performance of the US dollar against six major international currencies—including the euro, Japanese yen, British pound, Canadian dollar, Swedish krona, and Swiss franc.

The key is to understand “relativity”: the US Dollar Index does not represent the absolute value of the dollar, but reflects its strength relative to other currencies. The base period is set at 100; a value above 100 indicates the dollar has appreciated since the base period, while below 100 indicates depreciation. For example, an index at 76 means the dollar has fallen 23% compared to the base period; an index at 176 indicates a 76% rise.

Market operation logic: how the US Dollar Index drives asset prices

Market chain reactions when the dollar appreciates

When the US dollar appreciates, it usually triggers the following chain reactions: dollar appreciation → attraction of global capital → decline in international commodity prices. Since commodities (like oil, iron ore, etc.) are generally priced in dollars, a strong dollar means higher purchasing costs for non-dollar countries, directly suppressing global commodity demand.

From a financial asset perspective, a strong dollar attracts global capital inflows into the US markets seeking returns, but this is a “double-edged sword”: in the short term, US stocks may benefit, but if the dollar appreciates excessively, it will undermine US export competitiveness, ultimately dragging down corporate profits and stock market performance.

Reverse effects when the dollar depreciates

A decline in the US Dollar Index means the dollar is depreciating, reducing the attractiveness of dollar assets, leading to capital outflows and shifting into other currencies and asset classes. In this scenario, emerging market stocks, commodities, and assets denominated in local currencies often perform better.

In-depth analysis: the interaction between the US Dollar Index and major asset classes

Inverse resonance between gold and the dollar

The most typical phenomenon in the gold market is the dollar and gold pendulum effect: when the dollar appreciates, gold prices come under pressure; when the dollar depreciates, gold rises. This is because gold is globally quoted in dollars, and a strong dollar increases the cost of buying gold with other currencies, naturally lowering demand.

However, this is not an absolute rule. Inflation expectations, geopolitical risks, and real interest rates can also independently influence gold prices, so relying solely on the dollar index cannot accurately predict gold prices.

The complexity of stock market relationships

The relationship between the US Dollar Index and US stocks is not simply positive or negative correlation but is conditional on market environment:

Scenario 1: When the economy is doing well, dollar appreciation attracts capital inflows into the US, leading to rising US stocks.

Scenario 2: When the dollar appreciates too rapidly, export competitiveness declines, dragging down corporate profits and putting pressure on US stocks.

Historical cases confirm this: in March 2020, global stock markets plummeted but the dollar index surged to 103 (driven by safe-haven demand). Subsequently, as the US pandemic worsened and central banks implemented easing policies, the dollar quickly weakened to around 93.78, and US stocks rebounded. This indicates that the weight of economic policy signals often outweighs the exchange rate itself.

The core forces determining the direction of the US Dollar Index

Dominant role of interest rate policies

The Federal Reserve’s (Fed) interest rate decisions are the most direct factors influencing the US Dollar Index. Raising interest rates increases dollar returns, attracting global capital into US financial markets, pushing the dollar index higher; lowering rates releases capital outflow pressure, leading to dollar depreciation. That’s why every Fed meeting can shake the markets—interest rate signals directly alter the dollar’s relative attractiveness.

Fundamental support from economic data

Economic indicators such as non-farm payrolls, unemployment rate, CPI inflation index, and GDP growth form the fundamental logic behind dollar appreciation or depreciation. Strong economic data boost investor confidence in the US economy, supporting the dollar; weak data dampen confidence and weigh on the dollar.

Geopolitical risks and safe-haven premium

Events like wars, political turmoil, and financial crises trigger global risk aversion, causing markets to flock to “safe-haven assets.” As the most liquid and safest currency globally, the dollar often becomes the first choice, which explains why sometimes “the more chaotic, the stronger the dollar” appears to be a paradox.

Relative performance of other countries’ currencies

This is the most easily overlooked factor. The US Dollar Index is a “relative value”; when the European economy is sluggish and the European Central Bank adopts an easing policy leading to euro depreciation, even if the dollar itself does not appreciate, the dollar index will rise. In other words, the decline of others’ currencies can also boost the apparent strength of the dollar index.

How investors can respond to fluctuations in the US Dollar Index

Holdings of dollar assets: When the dollar appreciates, US stocks and dollar-denominated bonds increase in purchasing power when converted back to local currency. But if the dollar weakens, the local currency value of these assets shrinks accordingly.

Opportunities for forex traders: Trends in the dollar index provide directional signals for forex trading. Traders bullish on the dollar can profit during periods of rising index, and vice versa.

Cross-asset allocation strategies: Understanding the correlation between the dollar index and gold, commodities, and emerging market stocks can help investors make smarter asset allocations and dynamically adjust exposure during dollar appreciation and depreciation cycles.

Conclusion

The US Dollar Index is not just a number; it is a barometer of the global financial market. By systematically understanding its composition, influencing factors, and interactions with various assets, investors can better grasp market trends and optimize trading decisions. Whether engaging in USDX trading, allocating international assets, or hedging exchange rate risks, a deep understanding of the USDX is an essential foundation.