The U.S. Dollar Index (DXY) is a vital tool for forex traders, measuring the value of the US Dollar against a basket of six major currencies: the euro, Japanese Yen, British Pound, Canadian Dollar, Swedish Krona, and Swiss Franc. Established in 1973, the DXY provides insights into the Dollar’s strength and is essential for informed trading decisions.
The index shows the ratio of US Dollar against a basket of six major world currencies – Euro (EUR), Japanese Yen (JPY), British Pound (GBP), Canadian Dollar (CAD), Swedish Krona (SEK) and Swiss Franc (CHF). As part of this basket each currency has its own weight:
EUR – 57,6%
JPY – 13,6%
GBP – 11,9%
CAD – 9,1%
SEK – 4,2%
CHF – 3,6%
The composition of the basket since the year of 1973 changed only once – in 1999, when the euro was introduced.
At the time of appearance the index had a value of 100 points. Its historic lows were reached in March 2008 – 70.7 points, while the maximum value was recorded in February 1985 – 148.1 points. The index traded at the time of the global currency markets – 24 hours a day, 5 days a week. The index is presented in the form of various traded instruments: a stock market investment funds (exchange traded funds, or ETF), mutual funds and stock options.
The index is calculated as a weighted geometric mean of the above mentioned currencies according to the following formula: DXYt = 50,14348112 x (EURt) -0,576 x (JPYt) 0,136 x (GBPt) -0,119 x (CADt) 0,091 x (SEKt) 0,042 x (CHFt) 0,036.
In the formula, the power of coefficients corresponding to the weights of currencies in the basket. Calculation of the index coincides with the data used in calculating the Fed trade-weighted dollar index of currencies of countries which form the main foreign trade turnover of U.S. Most of the international trade in the U.S. accounts for the euro area (57.6%), followed by Japan – 13.6% United Kingdom – 11.9% Canada – 9.1%, Sweden -4.2% and Switzerland – 3.6%.
DXY Performance in 2024
In 2024, the DXY experienced notable movements, influenced by various economic factors. The index rallied by 7% during the year, reflecting the US Dollar’s strength against other major currencies. This appreciation was driven by elevated US interest rates and looming tariffs, which contributed to the dollar’s dominance in the forex markets.
Technical Outlook for 2025
As of early 2025, the DXY has maintained its upward trajectory, starting the year at 108.40 points. Analysts forecast that the index may attempt a breakout above 108.972 in the first quarter, driven by factors such as tariff effects, strong U.S. economic performance, and positive carry trades. The Federal Reserve’s cautious approach to rate cuts further supports this bullish outlook.
Key Factors Affecting the DXY
Several elements influence the DXY’s movements:
- Economic Indicators: U.S. economic data, including GDP growth, employment figures, and inflation rates, play a significant role in shaping the DXY’s value. markets.com
- Federal Reserve Policies: Monetary policy decisions, such as interest rate adjustments, directly impact the dollar’s strength. For instance, the Federal Reserve’s reluctance to cut rates aggressively has been a factor in supporting continued dollar strength. ig.com
- Global Economic Uncertainties: Geopolitical events, trade tensions, and global economic performance can lead investors to seek safe-haven assets, often benefiting the U.S. dollar. Recent tariff threats and concerns over technological competition have prompted investors to seek safer markets, influencing the DXY.
Relevance to Forex Day Traders
For forex day traders, the DXY serves as a barometer of the U.S. dollar’s overall strength, offering insights into potential currency pair movements. By monitoring the DXY, traders can gauge market sentiment and make informed decisions when trading USD-related pairs.
Effective Use of the DXY in Trading
To leverage the DXY effectively:
- Trend Confirmation: Use the DXY to confirm trends in USD currency pairs. For example, if the DXY is rising, it may indicate a strengthening dollar, supporting long positions in USD pairs.
- Divergence Identification: Identify divergences between the DXY and specific currency pairs to spot potential reversal opportunities.
- Risk Management: Incorporate DXY analysis into your risk management strategy to better understand potential market volatility and adjust positions accordingly.
By integrating the DXY into your trading toolkit, you can enhance your understanding of the forex market and improve your trading performance.
How to use the dollar index DXY in the Global Forex Markets?
It is important to understand whether you like it or not, US Dollar dictates trends of major world currencies, so the DXY index is an excellent starting point for determining the strength or weakness of US Dollar currency pairs.As a rule, the change of the trend of this index leads to changes in the trends of the currency pairs in which the USD is presented. For example, during an DXY uptrend the pairs with direct quote will also increase (e.g. USD/CHF, USD/CAD), and currency pairs with contrary quotation will be slow down (e.g. EUR/USD, GBP/USD).
Using a set of technical analysis tools, such as candles, support / resistance levels, moving averages, you can get an idea about the strength of the US Dollar in terms of long-term trends, the possible long and short-term reversals, as well as changes in the attitudes of market participants.
