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How the Dollar Index works and what currencies are in it

The index is a geometric weighted average of six foreign currencies. Since the economy of each country (or group of countries) is of different size, each weighting is different. The countries included and their weights are as follows: Euro (EUR): 57.6 percent Japanese Yen (JPY): 13.6 percent British Pound (GBP): 11.9 percent Canadian Dollar (CAD): 9.1 percent Swedish Krona (SEK): 4.2 percent Swiss Franc (CHF): 3.6 percent The index is calculated using the following formula: USDX = 50.14348112 × EURUSD^-0.576 × USDJPY^0.136 × GBPUSD^-0.119 × USDCAD^0.091 × USDSEK^0.042 × USDCHF^0.036 When the U.S. dollar is used as the base currency, as in the example above, the value is positive. When the U.S. dollar is the quoted currency, the value will be negative. This gives you the USDX, which can be traded on the Intercontinental Exchange, or ICE. ICE is a global exchange that handles clearing, financial data, and operates multiple markets across nine different classes. It also owns the trademarks for U.S. Dollar Index, Dollar Index, and USDX. The U.S. Dollar Index is property of the Intercontinental Exchange. Many factors will affect how the USDX moves. or of any currency, monetary policy, geopolitical conflicts, and export/import ratios, just to name a few. The U.S. dollar is the world’s reserve currency, and as such usually maintains high demand.

History of the U S Dollar Index

Before the U.S. Dollar Index was established by the in 1973, the U.S. dollar was pegged against physical gold, and the world’s currencies accordingly against the dollar. This system was facilitated by the Bretton Woods Agreement in which essentially most of the major world leaders agreed to physical gold as the basis for U.S. dollars, and then weighted the world’s other currencies thereafter. Then-President Richard Nixon effectively ended this agreement in the early 1970s when he announced the dollar would no longer be based on gold. From there, countries were free to “float” their currencies and allow markets to determine their value.

How to invest in the U S Dollar Index

There are a couple of different ways investors can get involved in trading the U.S. Dollar Index. One way is to trade the USDX like any other equity index. Rather than buying or selling several U.S. dollar “pairs” at the same time, you would trade the overall index that would rise and fall in line with the overall sentiment regarding the U.S. dollar. U.S. dollar pairs are the dollar paired with one other currency, for example, “USD/GBP” for the U.S. dollar traded against the British pound. Through the ICE platform, investors can also trade USDX futures. allow traders to hedge their accounts against currency risk and fluctuation in the U.S. Dollar. USDX futures trade for 21 hours a day through ICE. Index futures can react to both national and international economic data, as well as other reports that relate to the . Perhaps the simplest way to invest in the USDX is through an that provides broad exposure to the dollar against several different foreign securities, like the USDX does. A few top choices are the WisdomTree Bloomberg US Dollar Bullish ETF (USDU) and the Invesco DB US Dollar Index Bullish Fund (UUP). Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation. SHARE: Bankrate reporter Georgina Tzanetos covers investing and retirement. Brian Beers is the managing editor for the Wealth team at Bankrate. He oversees editorial coverage of banking, investing, the economy and all things money.

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