The dollar index, and what it really measures
The dollar index is the number most people mean when they say the dollar is strong. It is also nearly 58 percent euro, contains no Chinese yuan and has barely changed since the 1970s. None of that makes it useless, but it does make it a different thing from what most traders assume.
We rank all eight majors against the same basket, every morning.
What is inside it
Six currencies, with weights set when the index was built and left alone ever since, apart from folding the old European currencies into the euro.
| Currency | Weight |
|---|---|
| EUR Euro | 57.6% |
| JPY Japanese yen | 13.6% |
| GBP Pound sterling | 11.9% |
| CAD Canadian dollar | 9.1% |
| SEK Swedish krona | 4.2% |
| CHF Swiss franc | 3.6% |
Read that list again
- The euro, the pound and the franc together are roughly three quarters of it. This is a European index with a dollar label.
- Sweden has a larger weight than Switzerland, and neither is among America's main trading partners.
- There is no Chinese yuan, no Mexican peso, no Korean won. Three of the countries the United States trades with most are simply absent.
- So a rising index can mean the euro is in trouble rather than the dollar is wanted, and those are different trades.
What it is good for, and what it is not
It is good for continuity. Fifty years of the same measurement means a chart of it says something about the long arc of the dollar that no newer index can, and everyone watches the same levels, which makes those levels matter in their own right.
It is not good for answering the question a trader usually has: is the dollar the strong leg of this pair, or is the other currency the weak one. An index dominated by one counterpart cannot separate those, and the answer decides whether you take the dollar against the euro, the yen or something else entirely.
It is also not a trade-weighted measure of the American economy, although it is often used as one. The central banks publish proper trade-weighted indices for that, with the currencies their own economies actually deal in.
The same idea, done symmetrically
The fix is not a better list of six. It is to give every currency the same treatment: measure each of the eight majors against the equally weighted average of all eight, so that a big move in one of them cannot flatter or punish the other seven.
Done that way, the dollar gets a reading and so does the euro, the yen and the rest, on the same scale and over the same window. You can see at a glance whether EUR/USD is moving because the euro is bid or the dollar is being sold, which is exactly what the index cannot tell you.
That is what our strength ranking does every morning, with the macro reason written next to each currency rather than a line on a chart. Why pairs that share a leg then move together is on the correlation page.
Questions about the dollar index
What is the US dollar index?
A single number for the dollar against a fixed basket of six currencies: the euro, the yen, sterling, the Canadian dollar, the Swedish krona and the Swiss franc. It has been running since 1973 and the weights have barely changed, which is both its strength and its problem.
What is in the dollar index and how is it weighted?
The euro is about 57.6 percent of it, the yen 13.6, sterling 11.9, the Canadian dollar 9.1, the krona 4.2 and the franc 3.6. Together the euro, the pound and the franc make up roughly three quarters, so the index is mostly a measure of the dollar against Europe.
Is the dollar index a good measure of the dollar?
It is a good measure of EUR/USD with extras. It has no Chinese yuan, no Mexican peso, no Korean won and no emerging markets at all, so it does not describe how the United States actually trades today. A rising index can mean the euro is in trouble rather than the dollar is strong.
What is a better way to measure currency strength?
Measure every currency against the same basket rather than one against a fixed list. We take each of the eight majors against the equally weighted average of all eight, so a move in one currency cannot flatter the other seven, and you can see whether a pair is moving because of its base or its quote. How we measure it