Dollar Index Components Analysis: Why Are Traders Watching This Global Indicator?

Have you ever wondered why every time you read financial news, the anchor is discussing the dollar’s trend? More importantly—what exactly is the composition of the US Dollar Index, and how does it influence your investments?

Many people feel both unfamiliar and familiar with the US Dollar Index. Stock investors know it affects the Taiwan stock market, forex traders watch it to decide when to enter or exit, and those holding dollar assets are more concerned about its rise and fall. But if you ask, “What exactly are the components of the dollar index?” many might not be able to answer.

First, understand: What does the US Dollar Index actually measure?

Imagine you want to assess a person’s health status—you can’t just look at height; you need to consider weight, blood pressure, heart rate, and other indicators. The dollar index follows this logic—it’s not just an exchange rate, but a measure of the overall strength of the dollar relative to other international currencies.

Specifically, the dollar index tracks the exchange rate changes of the dollar against six major currencies. These six currencies are:

• Euro (EUR)
• Japanese Yen (JPY)
• British Pound (GBP)
• Canadian Dollar (CAD)
• Swedish Krona (SEK)
• Swiss Franc (CHF)

In simple terms, the purpose of the dollar index components is to answer a question: Is the dollar appreciating or depreciating compared to other major global economies’ currencies?

Distribution of weights in the dollar index components: Why does the euro account for more than half?

The proportions of these six currencies in the dollar index are not equal; they are set based on each country’s economic size, trade volume, and currency influence. Let’s look at the current allocation:

Why does the euro have such a high proportion? Because the Eurozone includes 19 EU countries with a large economic scale, making it the second-largest international currency after the dollar. So, any movement in the euro will cause significant fluctuations in the dollar index.

The Japanese Yen ranks second, accounting for less than 14%, but as the third-largest economy globally, with very low interest rates and high liquidity, it is often used as a safe-haven asset by international funds, playing an important role.

In contrast, the British Pound, Canadian Dollar, Swedish Krona, and Swiss Franc together account for less than 30%. But don’t underestimate them—especially the Swiss Franc, known for its “stability and safety,” still holds considerable reference value in the market.

Trading tip: When you observe sharp fluctuations in the dollar index, it’s helpful to first check if there’s any movement in the euro and yen—often, the answer lies there.

The practical significance of dollar index rises and falls

What happens when the dollar index rises?

An increase in the dollar index indicates the dollar is appreciating, becoming stronger relative to other currencies. This triggers a chain reaction:

Impact on global markets:

• International commodities priced in dollars (like crude oil, gold, agricultural products) become more expensive to buy, so their prices seem to decline
• Hot money flows into the US, making US Treasuries and US stocks more attractive
• US-imported goods become cheaper domestically, benefiting consumers
• However, US export companies face challenges as their products become more expensive and less competitive

Impact on Taiwan and emerging markets:

• Export-oriented economies like Taiwan face pressure—products become more expensive internationally, reducing sales
• Countries with dollar-denominated debt see increased repayment burdens
• Capital may flow out of Taiwan stocks, putting pressure on the market; the New Taiwan Dollar (NTD) tends to depreciate

What about when the dollar index falls?

A decline in the dollar index means the dollar is weakening, and market confidence shifts. During this period, you often see:

• International funds seek new investment opportunities, with Asian stocks and emerging markets attracting inflows
• Taiwan stocks may strengthen due to capital inflows, with potential for rising stock prices
• The New Taiwan Dollar has increased appreciation potential, lowering import costs but possibly limiting export competitiveness
• Holdings of dollar assets should be cautious of exchange losses—a weaker dollar means less NTD when converting back

How is the dollar index calculated?

The dollar index uses a “geometric weighted average method,” which assigns weights based on each currency’s importance. Simply put:

• The base period is set in 1985, with an initial value of 100
• Each currency’s weight is raised to the power of its proportion (e.g., 57.6% for euro is -0.576 power)
• The final index is derived through a formula converting these into a relative index

Key concept: The dollar index is not an exchange rate or a price; it’s a relative index reflecting the overall strength or weakness of the dollar since the base period.

Number interpretation:

• 100 = base level, no change
• 76 = 24% decline from the base, dollar has weakened
• 176 = 76% increase from the base, dollar has strengthened

The interaction between the dollar index and global assets

The dollar index’s fluctuations influence not only exchange rates but also nearly all dollar-denominated assets.

Dollar index vs Gold

This is a classic “see-saw” relationship:

• Dollar appreciation → Cost of buying gold in dollars rises → Gold prices fall
• Dollar depreciation → Gold becomes cheaper to buy → Gold prices rise

However, gold prices are also affected by inflation, geopolitical tensions, oil prices, and other factors, so it’s not solely dependent on the dollar index.

Dollar index vs US stocks

The relationship is more complex:

• Capital inflow-driven rise: dollar appreciation → funds flow into the US → US stocks rally
• Economic shock-driven decline: dollar becomes too strong → hurts export companies → US stocks decline

A classic example is March 2020—global stock markets plummeted, but the dollar surged to 103 due to safe-haven demand; later, the Fed’s massive money printing caused the dollar to weaken again to 93.78.

Dollar index vs Taiwan stocks and NTD

The general pattern is:

• Dollar appreciation → Capital flows out of Asia back to the US → NTD depreciates, Taiwan stocks face pressure
• Dollar depreciation → Emerging markets regain favor → NTD appreciates, Taiwan stocks benefit

But this is not an absolute rule; sometimes, during global optimism, US stocks, Taiwan stocks, and the dollar all rise together; during black swan events, various assets may fall collectively.

What factors drive changes in the dollar index?

1. Federal Reserve interest rate policies

The most direct influence. Rate hikes → higher US interest rates → attract capital inflows → dollar appreciates; rate cuts have the opposite effect. That’s why every Fed meeting makes the market tense.

2. US economic data

Strong indicators like non-farm payrolls, unemployment rate, CPI inflation, GDP growth → dollar strengthens; weak data → dollar weakens.

3. Geopolitical and international events

Wars, political turmoil, regional conflicts trigger global risk aversion, with the dollar often being the first safe-haven asset. “The more chaotic, the stronger the dollar” may sound contradictory, but it’s due to its safe-haven nature.

4. Movements of other major currencies

The dollar index is relative. When the euro or yen weaken due to their own economic issues or easing policies, even if the dollar remains unchanged, the dollar index will appear stronger.

Dollar index vs US trade-weighted dollar index: which is more accurate?

Many investors are familiar only with the “Dollar Index,” but the Federal Reserve itself often refers to the “US Dollar Trade-Weighted Index.” The two differ significantly:

Dollar Index (DXY)

• Most common, widely reported by media
• Calculated using six major currencies: euro, yen, pound, CAD, SEK, CHF
• Created by ICE (Intercontinental Exchange)
• Euro accounts for 57.6%, reflecting a “Euro-American perspective”

US Dollar Trade-Weighted Index

• Main reference for the Fed
• Based on actual US trade partner currencies, weighted accordingly
• Includes over 20 currencies, covering Asian emerging markets (CNY, KRW, TWD, THB, etc.)
• More accurately reflects the dollar’s actual purchasing power and global market conditions

Practical advice: For most investors, watching the dollar index is sufficient. But if you’re involved in forex trading or in-depth macro research, the trade-weighted index offers a more precise reference.

Mastering the components of the dollar index, and you master global capital flows

The dollar index is like a thermometer for the global financial market. Its six component currencies represent the economies of over 24 developed countries, and every fluctuation signals changes in international capital flows.

Whether you invest in gold, oil, US stocks, or Taiwan stocks, or engage in forex trading or currency exchange, understanding the structure of the dollar index components and how they influence various assets is fundamental to making informed decisions.

Treat the dollar index as your investment compass—it will help you see market trends more clearly.