What is the dollar index?
The U.S. dollar index is an indicator that comprehensively reflects the exchange rate changes of the U.S. dollar in the international foreign exchange market. It is 6 currencies (Euro, Japanese Yen, British Pound, Canadian Dollar, Swedish Krona, Swiss Franc) with reference to the exchange rate changes of the six currencies against the U.S. dollar in March 1973 The geometric mean weighted value is calculated, and its value is measured based on 100.00. The 105.50 price refers to a 5.50% increase in value since March 1973. Among them, the euro has the largest weight, exceeding 50%, so the rise and fall of the US dollar index can only represent the relative appreciation and depreciation of the US dollar and other currencies.
Calculation and formula of the dollar index
The dollar index is calculated 24 hours a day, 7 days a week.
Among them, 50.14348112 is a constant. This was introduced to make the base period index 100. The dollar index shows the combined value of the dollar. A measure of the strength of various currencies, similar to the Dow Jones Industrial Average, which shows the overall state of US stocks.
Main factors affecting the dollar index
- U.S. Federal funds rate: Under normal circumstances, when U.S. interest rates fall, the trend of the dollar will be weak; when U.S. interest rates rise, the trend of the dollar will be biased.
From the price changes of US Treasury bills (especially long-term Treasury bills), the trend of US interest rates can be explored, which can help predict the trend of the dollar. If investors believe that US inflation is under control, the interest income of existing Treasury bills, especially short-term Treasury bills, will be favored by investors and bond prices will rise. Conversely, if investors believe that inflation will intensify or worsen, then interest rates may rise to curb inflation, and bond prices will fall. The trend of the US dollar is greatly affected by interest rate factors.
- Commodity prices: Commodities on the international commodity market are mostly priced in U.S. dollars, so commodity prices have a relatively obvious negative correlation with the U.S. dollar index. Select a representative CRB index to superimpose with the US dollar index to visually observe the relationship between the US dollar index and the commodity price index.
The CRB index is a futures price index compiled by the Commodity Research Bureau (Commodity Research Bureau) based on the prices of 22 basic economically sensitive commodities in the world market, usually referred to as the CRB index. The CRB futures index reflects the prices of 17 commodities. It is calculated using arithmetic average and geometric average. It is not only the unweighted price average of 17 commodities, but also the average price of each commodity at different times. . CRB index is a good indicator of inflation. It fluctuates in the same direction as the inflation index, and fluctuates in the same direction as the bond yield. It can be said that the CRB index reflects the trend of economic development to a certain extent, and it also has a strong convergence with economic fluctuations.
- Euro exchange rate: The dollar index is basically a weighted index of a series of exchange rates, so it ultimately reflects the strength of the freely convertible currency between the United States and its main trading currency.
In the basket of currencies composed of the US dollar index, the euro is the most weighted currency, and the trend of the euro has naturally become an important factor affecting the US dollar index. The Euro exchange rate and the U.S. dollar index have a very strong negative correlation. This also verifies the important role of the euro exchange rate in the dollar index. Therefore, we can easily speculate that the strength of the euro exchange rate is likely to become an inverse indicator of the strength of the US dollar. The recent financial turmoil caused by the U.S. subprime mortgage crisis has had an important impact on the euro area. The euro area economy has experienced negative growth for two consecutive quarters, but it has entered a recession earlier than the United States. This has also become investors’ bearishness on the euro, which has prompted the dollar to soar. An important factor of
U.S. dollar index fluctuates sharply
The fundamentals of “the United States is strong and Europe is weak” supported the strong dollar at the beginning of the year. Since 2020, the bleak data of European economies has pressured the euro, making the dollar index soaring. In February, the economic prosperity index of the European economic leader Germany was only 8.7, a significant drop from 26.7 last month. At the same time, the industrial output data of Germany and France fell short of expectations. At the same time, a number of economic data in the United States continued to be good, and the economic fundamentals of Europe and the United States further widened. The euro fell 2.19% against the dollar that month to below 1.1, pushing the dollar index to a high of 99.92.
The spread of the new crown virus is brewing risk aversion. The new crown virus epidemic has spread to more than 110 countries and regions, and the World Health Organization (WHO) announced that the new crown virus epidemic has constituted a global pandemic. As the global medical community is still in the research stage on how to combat the new coronavirus, the spread, prevention and control of the epidemic has great uncertainty, which has driven the rise of global risk aversion and panic. Traditional safe-haven assets such as gold, yen, and Swiss francs have been sought after. U.S. stocks have continued to fall, and U.S. bond yields have repeatedly hit new lows. The CBOE Market Volatility Index (VIX), known as the “panic index”, once climbed to 2008 The historical high since the financial crisis in 2015.
The continued decline in asset prices has given rise to demand for liquidity, leading the dollar index to rebound. The accelerated decline in the price of global risk assets will inevitably trigger a large amount of demand for liquidation or redemption. The financial system is facing a liquidity crisis. It is necessary to sell assets to obtain liquidity to deal with redemptions or cover positions. Traditional safe-haven assets such as gold and U.S. bonds are suffering. Dragged down, the dollar index rebounded quickly. Central banks of various countries have urgently introduced loose policies to ease the pressure on market liquidity, and the rebound momentum of the U.S. dollar index has been suspended. However, if the global stock market and commodity prices continue to fall, the liquidity problem cannot be fundamentally resolved, and the market demand for U.S. dollars will continue to be strong. .
The underlying reasons for the fluctuation of the dollar index
Historical experience shows that the trend of the U.S. dollar index is closely related to the economic cycle. Through the comparative analysis of the economic cycle and the dollar cycle, it can be concluded that when the U.S. and European economic cycles diverge, the relative strength of the U.S. economy is usually accompanied by a stronger U.S. dollar; when the U.S. and European economic cycles are synchronized, the relatively high domestic U.S. The level of interest rates makes the dollar strong. vice versa. This is closely related to the euro against the dollar, which accounts for the highest proportion in the dollar index. The situation of “the United States is strong and Europe is weak” has supported the U.S. dollar index at a high level for a long time, and the strong U.S. economy is the fundamental support of the dollar index.
The market has long-standing concerns about the US economy entering a recession. The inversion of 10-year and 3-month U.S. Treasury yields that began in early 2019 triggered market panic, and the 10-year and 2-year Treasury yields also inverted in mid-August. The reason why the market continues to pay attention to the progress of the long-term and short-end inversion of U.S. debt is that almost every “inversion” in history is accompanied by the lesson of the U.S. economy entering a recession about a year later. Therefore, the current market has a great impact on the quality of U.S. economic data. High sensitivity.
The decline in the US dollar index started with poor economic data. The decline in the U.S. dollar index began on February 21, because the February service industry PMI and manufacturing PMI announced on the same day were far less than expected, especially the service industry PMI unexpectedly fell below the 50 rise and fall line, a record in November 2013 New low since. The service industry accounts for the largest share of the U.S. economy. Poor economic data has revived market concerns about the U.S. economic slowdown. Superimposed on the panic of the new crown epidemic, the US dollar index has fallen from a three-year high and has been falling all the way. The lack of confidence may lead to a shift in the direction of market expectations, which in turn will affect market behavior, leading to the US economy being overly bearish, and the US domestic economic growth rate may further slow down.