Like some currency pairs, the US dollar index also has its own technical chart. As shown below:
First of all, please note that the calculation of the US dollar index is performed 24 hours a day, 5 days a week without interruption. At the same time, the US dollar index measures the general value of the US dollar relative to the base of 100.
For example, the US dollar index is currently 86.212. This means that the dollar has fallen by 13.79% since the index was born.
If the reading of the US dollar index is 120.650, it means that the US dollar has risen by 20.65% since the index was born.
The calculation of the US dollar index began in March 1973. It was chosen as a reference point in March 1973 because it was a historic moment in the foreign exchange market, and since then the major trading countries have allowed their currencies to freely quote floating prices with currencies of another country. The dollar index is also referred to as the “base period” at the beginning.
Formula for calculating the dollar index
USDX = 50.14348112 × EUR/USD^(-0.576) × USD/JPY^(0.136) × GBP/USD^(-0.119) × USD/CAD^(0.091) × USD/SEK^(0.042) × USD/CHF^ (0.036)
Trade weighted dollar index
The Fed also uses another form of dollar index. We call it the “trade-weighted dollar index.”
The Fed wants to create an index based on the competitiveness of US commodities relative to other countries’ commodities, which can more accurately reflect the value of the US dollar relative to other countries’ currencies. The trade-weighted dollar index was formed in 1998.
Currency and its weight
The following table lists the weights of the major currencies in the US dollar trade-weighted index:
The main difference between the US dollar index and the US dollar trade-weighted index is the selected basket of currencies and their relative weights.
The US dollar trade-weighted index contains the currencies of major countries around the world, as well as some developing country currencies. In view of the development of global trade, the US dollar index is likely to better reflect the global value of the US dollar.
The selection of weights is based on annual trade data.