4-minute read
The US dollar is the world's reserve currency, and every global currency is measured against it. To assess the global strength of the dollar we turn to the dollar index...
USDX – the ICE U.S. Dollar Index
The most commonly used and widely recognised index is the ICE U.S. Dollar Index, which is maintained by Intercontinental Exchange, Inc. You'll see it listed as 'USDX' or 'DXY'.
The USDX was created in 1973 with a starting value of 100. It is by far the longest-standing dollar index and is ubiquitous in its use, but it isn't without critics.
The index is a geometric weighted average of a basket of currencies which has only been adjusted once – when the euro came into existence in 1999. Because of the heavy weighting toward the euro, many investors would prefer a more balanced index that truly reflects the global strength of the dollar.
Other Indexes
There are a few other indexes which attempt to show a more balanced and true measure of the dollar's value.
Wall St Journal Dollar Index
The WSJ dollar index was Created in 2012 and measures the dollar on a trade-weighted basis against 16 currencies. Every three years, the Bank for International Settlements (BIS) releases data on the FX market including annual trading volume: it's this data that is used to set the weightings in the index.
Bloomberg Dollar Spot Index
The BBDXY measures the dollar against ten currencies and is updated annually. The index data goes back to 2004 with a base level of 1000 and is generally considered a quality indicator of the dollar's global strength. Bloomberg is, of course, very vocal about the quality of the index, identifying three areas of strength:
- More representative in the basket of currencies it tracks
- More diversified and not dominated by the euro
- More dynamic as it is rebalanced annually
Read more about the Bloomberg Dollar Spot Index here:
Nominal Broad U.S. Dollar Index
The broad index is a product of the Federal Reserve and is published on the brilliant Federal Reserve Economic Data website (FRED).
Formed in 1998 by the Fed, the index is also known as the trade-weighted US dollar index and it aims to provide a more accurate reflection of the strength of the dollar relative to other world currencies, and not disproportionately weighted to the euro.
The weightings are updated annually, and currently, the basket is made up of 26 currencies! You can look up the weightings on the Fed website.
Which One is Best?
It depends on what is meant by "best"...
The ICE U.S. Dollar Index is the original and most widely used measure of the dollar's value, and because the basket has never been adjusted it gives a long-term perspective that is valuable.
But for a more relevant and accurate measure of the dollar's global strength, the more diversified and regularly updated indexes give a truer reflection. The smart people at Bloomberg and the Fed can be relied upon to provide accurate and meaningful data, so I'd go with one of those.
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