Why do fluctuations in the US Dollar Index affect your wallet? A global financial thermometer every investor must understand

Heard of “Dollar Index Strengthening” and “Dollar Depreciation”? Do these terms often leave you confused? Actually, these seemingly complex financial terms influence your investment returns behind the scenes. Today, we’ll use the most straightforward approach to help you understand how the Dollar Index truly affects global asset prices.

Why is the Dollar Index so important? What direct impact does it have on your investments?

If you hold US stocks, gold, or even Taiwan stocks, fluctuations in the Dollar Index will directly impact your account.

When the dollar appreciates, holding dollar-denominated assets becomes more valuable, but Taiwanese export companies may face pressure; when the dollar depreciates, Asian stock markets might attract hot money, and Taiwan stocks could benefit.

Simply put, the Dollar Index is like a weather vane for global capital flows. Watching its movements can help you grasp investment opportunities in advance.

The interaction between the Dollar Index and various assets

Dollar vs Gold: The seesaw effect

• Dollar strengthening → Gold prices fall
• Dollar weakening → Gold prices rise

Because gold is priced in USD, a stronger dollar means higher costs to buy gold, leading to decreased demand.

Dollar vs US Stocks: Complex dynamic relationship Sometimes, a rising dollar can boost US stock prices (capital inflow), but if the dollar becomes too strong, it can hurt US export companies, dragging down the stock market. The global stock crash in March 2020 is an example: the dollar surged to 103 due to safe-haven demand, then the Fed printed money aggressively, causing the dollar to quickly fall to 93.78.

Dollar vs Taiwan stocks and New Taiwan Dollar: Capital flow determines everything

• Dollar appreciation → Capital withdraws from Asia → TWD may depreciate, Taiwan stocks face pressure
• Dollar weakness → Hot money flows into Asia → TWD appreciates, Taiwan stocks benefit

But this pattern isn’t ironclad; sometimes, global market confidence soars, and US stocks, Taiwan stocks, and the dollar all rise together.

What exactly is the Dollar Index?

In simple terms, the Dollar Index (USDX or DXY) measures the strength of the dollar relative to other major currencies.

Think of it like this: the S&P 500 tracks the performance of 500 stocks; the Dollar Index tracks the exchange rate changes of the dollar against six key currencies. These six currencies are:

• Euro (EUR) – the largest component, over half
• Japanese Yen (JPY)
• British Pound (GBP)
• Canadian Dollar (CAD)
• Swedish Krona (SEK)
• Swiss Franc (CHF)

Although only six currencies, they cover over 24 developed countries, including 19 in the Eurozone, making the Dollar Index highly authoritative and influential in international finance.

Is the dollar appreciating or depreciating? What does that really mean?

The real meaning of a rising Dollar Index

When you see news saying “Dollar Index surges,” it actually means the dollar is strengthening against other major currencies.

Benefits for the US:

• Imported goods become cheaper, boosting US consumers’ purchasing power
• Global capital flows into US markets, increasing the attractiveness of US bonds and other dollar assets
• Helps curb inflation and supports economic growth

Pressure on other countries:

• Export-oriented economies like Taiwan see their products become more expensive internationally, reducing competitiveness
• Emerging markets with dollar-denominated debt face higher repayment pressures
• Costs of importing energy (oil, natural gas) rise

What does a falling Dollar Index mean?

A weak dollar indicates declining market confidence, prompting investors to seek alternative investments, with capital flowing into emerging markets and Asian stocks.

Impact on Taiwan:

• Hot money enters to buy Taiwan stocks, potentially pushing prices higher
• The New Taiwan Dollar may appreciate, making imports cheaper but hurting export competitiveness
• If you hold USD assets (US stocks, USD fixed deposits), beware of exchange loss risks, as a depreciating dollar means fewer TWD when converting back

Composition and weighting of the Dollar Index

The Dollar Index isn’t a simple average of six currencies; it uses a geometric weighted average based on each country’s economic size, trading volume, and currency influence.

Key observation:

With over half the weight in euros, the Dollar Index’s fluctuations are highly sensitive to European economic data. Changes in ECB policies or Eurozone economic indicators are crucial clues for monitoring the Dollar Index.

The Yen ranks second because Japan is the third-largest economy globally, with very low interest rates and high liquidity, often serving as a safe-haven currency.

Four key factors influencing the volatility of the Dollar Index

1. Federal Reserve’s interest rate policies – the most direct driver

Rate hikes → US interest rates rise → Global capital flows into the US → Dollar appreciates, index rises

Rate cuts → Capital outflows → Dollar depreciates, index falls

Every Fed meeting causes market tension because interest rate decisions directly impact dollar strength.

2. US economic data – a barometer of market confidence

Non-farm payrolls, unemployment rate, CPI inflation, GDP growth, etc. If data is strong, it indicates a robust US economy, and the dollar tends to strengthen. Weak data can lead to dollar weakness.

3. Geopolitical and international events – triggers for risk aversion

Wars, political turmoil, regional conflicts cause markets to flock to “safe assets.” The dollar is often the first choice, so sometimes the more chaotic, the stronger the dollar. It may seem counterintuitive but is consistent with reality.

4. Performance of other major currencies – the game of relative value

The Dollar Index is a relative measure of the dollar versus six foreign currencies. When the euro or yen weaken due to economic slowdown or loose policies, even if the dollar remains unchanged, the index can rise. In other words, depreciation of other currencies can make the dollar appear stronger.

How to correctly interpret the value of the Dollar Index

The Dollar Index is a relative index, not an exchange rate or price, based on a long-term comparison with the base period (1985).

In summary: The higher the Dollar Index, the stronger the dollar; the lower, the weaker it is in the international market.

Dollar Index vs Trade-Weighted US Dollar Index: Which should you watch?

Many investors only know to look at the “Dollar Index,” but the Fed itself more often references the “Trade-Weighted US Dollar Index.” What’s the difference?

Dollar Index (DXY)

• Most common, widely reported by media
• Only considers six major currencies
• Created by ICE (Intercontinental Exchange)
• Euro accounts for 57.6%, leaning towards European perspective
• Suitable for quick market sentiment checks

Trade-Weighted US Dollar Index

• The official indicator primarily used by the Fed
• Covers over 20 currencies, including emerging Asian currencies (RMB, TWD, KRW, THB, MXN, etc.)
• Weighted based on actual US trade partners
• More aligned with current global market conditions and US trade realities

Investment tip: If you’re a general investor, watching the Dollar Index is sufficient. But if you trade forex, conduct macro research, or want a deeper understanding of Fed policy implications, the Trade-Weighted Index offers more accurate insights.

Mastering the Dollar Index helps you grasp global capital flows

Fluctuations in the Dollar Index influence gold, oil, stocks, and all assets priced in USD. To make smarter investment decisions in the international financial markets, especially in forex trading, observing the Dollar Index is like feeling the pulse of the global market.

Next time you see news about “Dollar appreciation” or “Dollar depreciation,” remember to also observe global capital flows—when the dollar appreciates, funds flow into the US; when it weakens, money moves into Asia. Using this simple logic, you can more accurately predict market trends.