What is the US Dollar Index (DXY)?

The ICE US Dollar Index, ticker DXY, measures the dollar against a basket of six currencies with fixed weights: the euro 57.6%, the Japanese yen 13.6%, the British pound 11.9%, the Canadian dollar 9.1%, the Swedish krona 4.2% and the Swiss franc 3.6%. It started at 100 in March 1973, soon after the dollar began to float freely, so a reading above 100 means the dollar is stronger against this basket than it was then, and below 100 weaker. Its make-up has changed only once, when the euro replaced several European currencies in 1999.

Because of those weights, the DXY is mostly a measure of the dollar against the euro, and it leaves out the currencies of China and Mexico, two of the largest US trading partners. The Federal Reserve’s nominal broad dollar index fills that gap: it covers 26 currencies weighted by each economy’s share of US trade, updated every year. In the Fed’s 2019 revision, the largest 2017 weights were the euro area at 18.6%, China at 16.2% and Mexico at 13.3%. FRED publishes it as DTWEXBGS. The two indexes usually point the same way, but they can diverge when emerging-market currencies move apart from the euro and the yen.

US Dollar Index (DXY)
An index from ICE that measures the US dollar against six currencies with fixed weights, the euro making up 57.6%. It began at 100 in March 1973.
Broad dollar index
The Federal Reserve’s measure of the dollar against 26 currencies, weighted by their share of US trade and updated yearly. Unlike the DXY, it includes the Chinese yuan and the Mexican peso.

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Horizontal bars for the fixed weights of the ICE US Dollar Index (DXY): euro 57.6% highlighted in yellow, Japanese yen 13.6%, British pound 11.9%, Canadian dollar 9.1%, Swedish krona 4.2%, Swiss franc 3.6%. A side card reads Fed broad dollar index: 26 currencies, weights from US trade updated yearly, includes China and Mexico. A note reads DXY began at 100 in March 1973; the euro replaced its European currencies in 1999.

How does a strong dollar affect US companies’ earnings?

Many large US companies earn a big share of their revenue abroad. Among the 261 S&P 500 companies that reported it in comparable detail, S&P Dow Jones Indices counted 43.6% of 2017 sales coming from outside the United States. Those sales are made in euros, yen and other currencies and must be translated into dollars for the company’s reports.

The drawing at the top of the page shows the effect. A hypothetical US company sells €100 million a year in Europe. At a starting rate of 1.10 dollars per euro, that is $110 million. If the dollar strengthens and the euro falls to 1.00, the same sales are reported as $100 million, 9.1% less; if the dollar weakens and the euro rises to 1.20, they are reported as $120 million, 9.1% more. Nothing changed in Europe: same customers, same euros. That is why companies often quote growth in constant currency, and why a strong dollar is a frequent explanation for weaker reported results during earnings season.

The effect is not the whole story. A strong dollar also makes imported parts cheaper for US firms and US exports dearer for foreign buyers, and companies hedge part of their exposure. Businesses that sell mainly at home, such as utilities and regional banks, are much less exposed; stock market sectors helps tell them apart.

Currency translation
Converting a company’s foreign revenue and profit into its reporting currency at the period’s exchange rates. It changes the reported figures without any change in the underlying business.
Constant currency
Growth measured as if exchange rates had stayed at the earlier period’s levels, to show the business trend without currency effects.

Why does a strong dollar weigh on emerging markets and commodities?

Most commodities, including oil and gold, are priced in dollars. When the dollar rises they cost more for buyers paying in other currencies, which can dampen demand, so a strong dollar has often coincided with weaker commodity prices; see gold trading and oil prices and stocks.

For emerging markets, the bigger channel is debt. About half of cross-border loans and international debt securities are in dollars, Gita Gopinath and Pierre-Olivier Gourinchas wrote on the IMF blog in October 2022, when the dollar stood at its highest level since 2000. In the drawing below, a hypothetical company abroad owes $10 million while its own currency weakens from 5 to 6 per dollar: the debt grows from 50 million to 60 million in local currency, +20%, and yearly interest at 6% grows from 3.0 million to 3.6 million, although nothing changed in the business. Research at the Bank for International Settlements (BIS) found that a stronger dollar goes with slower growth in dollar cross-border bank lending and weaker real investment in emerging economies.

The same IMF post noted that the dollar’s share of world exports has held around 40%, far above the US share of world trade, so a strong dollar also raises import prices in many countries, more so in emerging markets than in advanced economies.

Dollar-denominated debt
Loans or bonds that must be repaid in US dollars. For a borrower whose income is in another currency, the debt grows in local terms when the dollar strengthens.

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A hypothetical company abroad owes $10 million. Two bars for its debt in local currency, in millions: 50 before and 60 after, in red. A card reads local currency per $1: 5 → 6; debt in local currency: 50 → 60; interest at 6%: 3.0 → 3.6; and in large red figures +20%. A note reads nothing changed in the business, yet the debt grew 20% in its own currency.

What does the dollar mean for Saudi and Gulf investors?

The Saudi riyal is pegged to the US dollar at 3.75, as are most Gulf currencies. For a Saudi investor holding US stocks, the dollar’s swings against the euro or the yen do not change the riyal value of the holding; the currency cost is the margin or fee on the conversion, as how to buy US stocks explains. For holdings in European or Japanese stocks, by contrast, a rising dollar shrinks their value in riyals.

The peg also ties Saudi conditions to the US. Saudi interest rates tend to follow the Federal Reserve’s, so a Fed decision matters in Riyadh; see the Federal Reserve and stocks. And oil, the kingdom’s main export, is priced in dollars, so oil revenue in riyals moves with the dollar price of oil; see oil prices and stocks.

What moves the dollar, and how do traders watch it?

The dollar moves with interest rate gaps, growth and risk appetite. Higher US yields relative to other countries tend to draw money into dollars, and in periods of global stress investors have often bought dollars as a safe haven, which is why the dollar can rise while stocks fall. Habits many traders use:

  • Chart TVC:DXY on TradingView next to SPY and an emerging-markets fund to see whether dollar moves line up with stock moves; intermarket analysis shows a full dashboard.
  • Read the currency comments in earnings reports: companies usually say how much exchange rates added to or took from revenue.
  • Remember that the DXY is mostly euro against dollar; check the Fed’s broad index when China or Mexico matter.
  • Treat each link as a tendency: the dollar and stocks have moved together in some periods and in opposite directions in others.
  • To trade currency pairs directly, start with forex trading for beginners.