Major Influencers of the U.S. Dollar Index

A measure of the value of the U.S. dollar relative to majority of its most significant trading partners is Dollar Index (USDX). This index is similar to other trade-weighted indexes, which also use the exchange rates from the same major currencies. Currently, this index is calculated by factoring in the exchange rates of six major world currencies:

• Euro (EUR), 57.6% weight

• Japanese yen (JPY) 13.6% weight

• Pound sterling (GBP), 11.9% weight

• Canadian dollar (CAD), 9.1% weight

• Swedish krona (SEK), 4.2% weight

• Swiss franc (CHF) 3.6% weight

The Euro is weighted more heavily than all the other currencies combined. When the Euro changes, it pretty much dictates what happens to the USDX unless all the other currencies move in the opposite direction to compensate for it. Even though the Euro is so heavily weighted, the USDX is a more accurate reflection of the dollar’s strength than just a Dollar to Euro comparison alone.

USDX goes up when the US Dollar gains “strength” (value) when compared to other currencies. USDX started in March 1973,soon aft er the dismantling of the Bretton Woods system with a base of 100 and is relative to this base. This means that a value of 120 would suggest that the U.S. dollar experienced a 20 per cent increase in value over the time period. It has since traded as high as 164.7200 in February 1985, and as low as 70.698 on March 16, 2008.

The makeup of the “basket” has been altered only once, when several European currencies were subsumed by the euro at the start of 1999. The makeup of the “basket” is overdue for revision as China, Mexico, South Korea and Brazil are major trading partners presently which are not part of the index whereas Sweden and Switzerland are continuing as part of the index.

USDX is updated whenever US Dollar markets are opening, which is from Sunday evening New York time (early Monday morning Asia time) for 24 hours a day to late Friday afternoon New York time.

IMPORTANCE OF THE US DOLLAR

The US Dollar is by far the most transacted currency in the world. This is due to several factors as you have already learned in the last chapter. It’s the world’s primary Reserve Currency, which makes this currency highly susceptible to changes in interest rates.

Today’s various major currencies like the Euro, the British Pound, the Australian Dollar and the New Zealand Dollar are moving against the American currency, and so does the Japanese Yen, the Swiss franc and the Canadian Dollar. 70 per cent of the U.S economy depends on domestic consumption, making its currency very vulnerable to data on employment and consumption.

All US Dollar denominated bank deposits held at foreign banks or foreign branches of American banks are known as “Eurodollars”.

Some economists maintain that the overseas demand for Dollars allows the United States to maintain persistent trade deficits without causing the value of the currency to depreciate and the flow of trade to readjust.

The United States Dollar decreased to 94.57 US dollars in February from 94.80 in January of 2015. The United States Dollar averaged 97.31 from 1967 until 2015, reaching an all time high of 164.72 in February of 1985 and a record low of 71.58 in April of 2008.

CORRELATION BETWEEN AMERICAN STOCK PRICES AND THE VALUE OF THE U.S. DOLLAR

If we compare the US Dollar Index (USDX), an index that tracks the value of the U.S. dollar against six other major currencies, and the value of the Dow Jones Industrial Average (DJIA), Nasdaq and S&P 500 over a 20-year period, the correlation coefficient calculated for the USDX versus the DJIA, Nasdaq and S&P 500, is 0.35, 0.39 and 0.38, respectively.

Note that all of the coefficients are positive, which means that as the value of the U.S. dollar increases, so do the stock indexes, but only by a certain amount.

Now that we have covered the most traded currency across the globe, we will move on to study our domestic currency, Indian Rupee in the next article