The dollar index: what it measures and why it moves everything else

The dollar index measures its value against a basket of currencies rather than a single one. It tells you whether the dollar is strengthening broadly or whether just one pair is moving.

Why an index is needed

If you look only at euro-dollar you cannot tell a strengthening dollar from a weakening euro: the pair rises either way. An index resolves that ambiguity by averaging the dollar’s behaviour against several currencies at once. If it rises against all of them, the move belongs to the dollar.

DXY and the broad index are not the same

The best known is the DXY, created in 1973. Its problem is that it reflects the world of that era: the euro makes up more than half the basket, with the yen, sterling, Canadian dollar, Swedish krona and Swiss franc completing it. It excludes the Chinese yuan and the Mexican peso, two of the United States’ main trading partners today. The DXY is, in practice, an index of the dollar against Europe.

The Federal Reserve publishes a better alternative, the broad dollar index, which weights currencies by each country’s actual trade share and is updated yearly. It includes the yuan, the peso and the rest of the relevant partners. It is the one Semavor uses, because it better describes the pressure the dollar exerts on the world economy, even if the financial press still quotes the DXY out of habit.

What moves the dollar

The first factor is relative interest rates. If the Federal Reserve pays more for money than the European Central Bank, capital chases that return and buys dollars to do so. That is why the dollar reacts sharply to every US inflation or jobs print: those numbers change what the market expects the Fed to do.

The second is its haven status. In moments of global tension the dollar appreciates even when the problem is in the United States, simply because it is the currency the world prefers to shelter in when it trusts nothing else. It happened in March 2020 and it happens in every geopolitical scare.

Why a strong dollar squeezes the world

Much of emerging-market debt is issued in dollars, but their revenues are in local currency. When the dollar appreciates, that debt gets more expensive without anything else changing: it takes more pesos, reais or rupees to repay the same amount. This is the mechanism behind several emerging-market debt crises.

On top of that, commodities are priced in dollars. A strong dollar makes them more expensive for everyone earning in another currency, which brakes global demand and usually pushes crude and metal prices down. That is why the dollar and commodities almost always move in opposite directions.

Semavor specifically watches when the dollar makes a sustained cross of its 50-session average, because that cross marks underlying trend changes rather than daily noise. The dollar’s direction conditions much of what happens across other markets.

Frequently asked questions

What is the DXY?

The dollar index created in 1973, measuring its value against six currencies: euro, yen, sterling, Canadian dollar, Swedish krona and Swiss franc. The euro makes up more than half the basket and the Chinese yuan is absent.

Why does the dollar rise when there is fear?

Because it is the ultimate haven currency. In moments of global tension capital seeks dollars even when the problem is in the United States, simply because it is the asset the world trusts when it trusts nothing else.

Which dollar index does Semavor use?

The Federal Reserve’s broad index, which weights currencies by actual trade share and includes the yuan and the Mexican peso. It describes the dollar’s pressure on the world economy better than the DXY.