US Dollar Strength Index (DXY): A Comprehensive Guide for Traders

In the global financial markets, a serious trader cannot ignore the impact of the US dollar on almost all assets. When the dollar’s value rises, that movement puts pressure on commodity prices, oil, and gold. When it declines, liquidity is attracted toward higher-yield assets. For this reason, professionals use the (DXY) dollar index as a true compass to read broader market trends.

This index provides a unified view of the dollar’s value against a basket of major currencies, sparing traders the hassle of monitoring separate forex pairs. By understanding how it works and the factors that influence it, investors can make more accurate decisions and protect their portfolios from volatility.

What the dollar index really means

The US dollar index is not just a random number; it is an accurate geometric measure reflecting the average performance of the dollar against a basket of six global currencies weighted according to US trade importance.

The primary purpose of this index is to provide a standard tool to measure the dollar’s strength and its impact on the global economy. Instead of tracking each currency’s movements individually, you can read a single number that tells you whether the dollar is generally strong or weak.

History and development of the index

The dollar index was launched in 1973 following the collapse of the Bretton Woods system, which linked foreign currencies to the dollar backed by gold. Its creation filled a gap: how does the market measure the dollar’s strength after abandoning gold?

The index started with a base value of 100 points and has undergone significant updates over the decades. Notably, in 1999, the euro was added to replace multiple European currencies. To date, the index reflects a balance among the major economies partnering with the United States.

Major historical movements:

• 1973-1984: Sharp decline below 90 points due to US inflation
• 1985: Reached a record high of 160 points (All-time peak)
• 2002-2008: Dropped to 70 points during the mortgage crisis
• 2022: Spiked sharply to 110 points amid interest rate tightening
• 2025: Currently declined to around 96 points due to expectations of rate cuts

How is the index calculated?

The dollar index calculation relies on a weighted geometric average of exchange rates against six specified currencies. Each currency has a relative weight reflecting its importance in US trade.

Basket components and weights:

A crucial note: the euro, yen, and pound together constitute over 80% of the index, meaning their movements primarily determine the actual trend.

Mathematical formula: