The current U.S. dollar banknotes in circulation are all versions of banknotes issued since 1929. Appeared after the passage of the American Coinage Act in 1792. The current US dollar issuance is controlled by the Federal Reserve System. Since 1913, the United States established the Federal Reserve System and issued Federal Reserve Notes. More than 99% of the current banknotes in circulation are Federal Reserve Notes. The U.S. dollar issuance authority is Congress, and the Federal Reserve Bank is responsible for the specific issuance business. After World War II, the United States forced the major European powers to agree that international currency settlement must be settled in US dollars, so the US dollar is widely used as a reserve currency in countries other than the United States. The U.S. dollar is the base currency in foreign exchange exchanges and the main currency in international payments and foreign exchange transactions, and it occupies a very important position in the international foreign exchange market.
Most indexes on the market are compiled by exchanges, and the US dollar index is no exception. It is designed, maintained and published by the Intercontinental Exchange (ICE). In March 1973, the US dollar index came out with an initial value of 100. Since then, its highest trading price in February 1985 was 164.720, and its lowest trading price on March 16, 2008 was 70.698. It has not yet reached a new high or new low. After entering the 21st century, the currency basket of the US dollar index has not been revised, which makes it somewhat out of date. In 1973, the countries with the closest trade with the United States were the Eurozone, Japan, the United Kingdom, Canada, Sweden, and Switzerland. By 2020, the countries with the closest trade with the United States became China, Mexico, South Korea, and Brazil. However, the U.S. dollar index is still calculated and fluctuated according to the currencies of the old trading countries, so in some major international events, the reference of the U.S. dollar index has dropped sharply. The most typical is the trade friction that broke out between China and the United States in 2018. If you only look at the dollar index analysis, you will feel that this event is not a negative dollar, but a positive dollar, which is obviously not in line with reality. Perhaps Mexico, South Korea, and Brazil are nothing, but the dollar index does not include the renminbi in the currency basket. It is unreasonable at all. After all, China’s GDP is second only to the United States and second in the world.
The formula for calculating the US dollar index is: USDX = 50.14348112 × EURUSD ^-0.576 × USDJPY ^0.136 × GBPUSD ^-0.119 × USDCAD^ 0.091 × USDSEK^ 0.042 × USDCHF ^0.036.
Several pieces of information can be found from the above formula:
- The constant 50.14348112 is the number obtained by the inverse operation in order to set the final result to the integer 100 when the dollar index was originally designed. This number cannot be changed.
- The U.S. dollar index contains six currency pairs, and the weights are:
It should be reminded that the weight here is not as simple as multiplying the exchange rate by the percentage, but the N-th power of the exchange rate, where N is the middle column of decimals in the above table. In addition, as long as USD is not in the front of the currency pair, its weight is negative, such as EURUSD and GBPUSD.
Take the exchange rate on December 15, 2020 as an example:
EURUSD exchange rate is 1.21367, and its -0.576 power is 0.89445
USDJPY exchange rate is 104.045, its 0.136 power is 1.88079
GBPUSD exchange rate is 1.33205, and its -0.119 power is 0.96645
USDCAD exchange rate is 1.27629, and its 0.091 power is 1.022448
USDSEK exchange rate is 8.4133, and its 0.042 power is 1.09357
USDCHF exchange rate is 0.88675, and its 0.036 power is 0.99568
Bring the six results obtained into the above dollar index calculation formula:
USDX=50.14348112 ×0.89445 ×1.88079×0.96645×1.022448×1.09357×0.99568 =50.14348112 ×1.81001997
The final number is 90.7607021925. After taking two decimal places according to the habit, the final value is 90.76, which is the current dollar index quotation.
- SEK is the currency of Sweden, called the crown; CHF is the currency of Switzerland, called the Swiss franc. Sweden joined the European Union in 1995, but it is not part of the Eurozone. Switzerland has neither joined the European Union nor used the Euro. Sweden and Switzerland are both small European countries, but both have their own irreplaceable pillar industries, such as the former’s industry and the latter’s financial industry.
Although many trading products are not included in the dollar index basket of currencies, they will still be affected by dollar fluctuations because they are directly or indirectly priced in dollars, such as gold and crude oil. In the actual trading process, the most obvious impact of the US dollar index is EURUSD, because the weight of the euro is 0.576, the highest among all currencies. Because the renminbi is not included in the calculation formula of the US dollar index, there is no strong positive correlation between the fluctuation of USDCNH and the US dollar index, and its trend is relatively independent.