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What is the U.S. Dollar Index?
If you’ve traded stocks, you’re familiar with all the indices available such as the Dow
Jones Industrial Average (DJIA), NASDAQ Composite Index, Russell 2000, S&P 500,
Wilshire 5000, and the Nimbus 2001. Oh wait, the last one is actually Harry Potter’s
broomstick.
Well if U.S. stocks have an index, the U.S. dollar can’t be outdone. For currency traders
like us, we have the U.S. Dollar Index (USDX).
The U.S. Dollar Index consists of a geometric weighted average of a basket of foreign
currencies against the dollar.
Come again?! Okay before you fall asleep on us after that super geeky definition, let’s
break it down.
It’s very similar to how the stock indices work in that it provides a general indication of
the value of a basket of securities. Of course, the “securities” we’re talking about here are
other major world currencies.

The Basket
The U.S. Dollar Index consists of six foreign currencies. They are the:
Euro (EUR)
Yen (JPY)
Cable (GBP)
Loonie (CAD)
Kronas (SEK)
Francs (CHF)
Here’s a trick question. If the index is made up of 6 currencies, how many countries are
included?
If you answered “6”, you’re wrong. If you answered “20”, you’re a genius.
There are 20 countries total, because there are 15 members of the European Union that
have adopted the euro as their sole currency, plus the other five countries (Japan, Great
Britain, Canada, Sweden, and Switzerland) and their accompanying currencies.
It’s obvious that 20 countries make up a small portion of the world but many other
currencies follow the U.S. Dollar index very closely. This makes the USDX a pretty good
tool for measuring the U.S. dollar’s global strength.

Now that we know what the basket of currencies are, let’s get back to that “geometric
weighted average” part. Because not every country is the same size, it’s only fair that each
is given appropriate weights when calculating the U.S. Dollar Index. Check out the
current weights:

As you can see, with its 12 countries, euros make up a big chunk of the U.S. Dollar Index.
The other five make up less than 43 percent.
Here's something interesting: When the euro falls, which way does the U.S Dollar Index
move?
The euro makes up such a huge portion of the U.S. Dollar Index, they might as well call
this index the "Anti-Euro Index". Because the USDX is so heavily influenced by the euro,
people have looked for a more "balanced" dollar index. More on that later though. First,
let's go to the charts!

The U.S. Dollar Index Formula

This is strictly for the grown and geeky. Here is the formula to calculating USDX:
USDX = 50.14348112 × EURUSD^(-0.576) × USDJPY^(0.136) × GBPUSD^(-0.119) ×
USDCAD^(0.091) × USDSEK^(0.042) × USDCHF^(0.036)

Currencies and Weights

Here is the current weighting of the index:
Euro area 17.191
Canada 15.550
Japan 9.220
Mexico 9.826
China 16.269
United Kingdom 4.500
Taiwan 2.436
Korea 3.520
Singapore 2.057
Hong Kong 1.838
Malaysia 2.124
Brazil 1.987
Switzerland 1.404
Thailand 1.435
Philippines 0.713
Australia 1.189
Indonesia 0.961
India 1.417
Israel 1.056
Saudi Arabia 0.818
Russia 1.152
Sweden 1.025
Argentina 0.485
Venezuela 0.486
Chile 0.841
Colombia 0.499
Total 100
*Weights as of June 17, 2008