A must-read for global investors! How do the fluctuations of the US Dollar Index influence your assets? Get a grasp of this market indicator in one article

Your US stocks, gold, and Taiwan stocks will rise and fall, but there is actually an invisible driver behind it—the US Dollar Index. But what exactly is this index measuring? Why is the financial market so sensitive to it? Today, I will tell you the answer directly.

What is the US Dollar Index measuring? A simple explanation

Many investors see news like “US Dollar Index rising” or “US dollar weakening” and often feel confused. Actually, this thing isn’t that complicated.

The US Dollar Index (USDX or DXY) is a tool to measure the relative strength of the dollar. It tracks the exchange rate performance of the dollar against six major currencies (Euro, Yen, Pound, CAD, Swedish Krona, Swiss Franc). Simply put: Think of the dollar as a stock, and the Dollar Index as its “stock price”.

When the US Dollar Index is high → the dollar is relatively strong → the dollar is valuable When the US Dollar Index is low → the dollar is relatively weak → the dollar is less valuable

Because the dollar is the most commonly used trading currency worldwide, commodities, energy, and gold are almost all priced in dollars, so every move of the dollar affects the entire market.

How does the rise and fall of the US Dollar Index affect your investments?

Don’t think of the US Dollar Index as just a financial news sidebar. The reality is, it directly impacts your assets.

When the dollar appreciates (index rises)

What does a stronger dollar mean? Very simply, hot money flows into the US. Why? Because investing in dollar assets (US Treasuries, US stocks) becomes more attractive, with relatively higher returns.

The consequences are:

• Taiwan stocks face capital outflow pressure. Hot money withdraws from Asia and enters the US market, putting selling pressure on Taiwan stocks
• New Taiwan dollar may depreciate. When the dollar becomes more sought after, the NT$ becomes less valuable in comparison
• Your dollar-denominated assets appreciate. People holding US stocks and bonds see their paper profits increase when converted to NT$
• Export companies struggle. When Taiwanese manufacturing goods are priced in dollars, they seem more expensive, possibly reducing orders

For an export-oriented economy like Taiwan, a rising dollar is not good news.

When the dollar depreciates (index falls)

Conversely, when the dollar weakens, the situation reverses.

• Hot money flows back into Asia. Investors seek higher returns, turning to emerging markets, making Taiwan stocks and RMB assets more attractive
• New Taiwan dollar appreciates. Supply and demand shift, NT$ gains value
• Dollar assets shrink. Your US stocks and dollar deposits valued in NT$ decrease (currency loss)
• Exporters’ competitiveness improves. When priced in dollars, products look cheaper, orders increase

Simple pattern: Strong dollar = capital flows back to the US = pressure on Taiwan stocks; Weak dollar = capital flows into Asia = opportunity for Taiwan stocks

How is the US Dollar Index calculated? The big game of six currencies

The US Dollar Index isn’t an average of six currencies; it’s weighted based on each country’s economic size, trading volume, and international influence.

Currently, the composition is:

The euro accounts for nearly 60%. Why? Because the Eurozone includes 19 countries with a huge economic size, making the euro the second-largest international trading currency after the dollar. This also means that if you see the dollar index fluctuate, first look at the euro’s movement.

The yen ranks second, mainly because Japan’s economy is large, and the yen’s extremely low interest rates and high liquidity make it a common tool for global risk aversion and arbitrage.

The remaining currencies combined account for less than 30%, but currencies like the Swiss Franc, known for “safety and stability,” still have reference value during panic markets.

The interaction logic between the US Dollar Index, gold, US stocks, and Taiwan stocks

Here’s the most concerned question: With changes in the US Dollar Index, how should I adjust my portfolio?

US Dollar Index vs Gold

This is the classic “see-saw” relationship:

• US dollar appreciation → Gold becomes more expensive (costs more to buy with dollars) → Gold prices fall
• US dollar depreciation → Gold becomes cheaper → Gold prices rise

A classic example is spring 2020. The pandemic outbreak caused a surge in global risk aversion, and the dollar index soared to 103. But as the Federal Reserve flooded the market with money, the dollar quickly weakened, and the index dropped to 93.78, while gold surged simultaneously.

But note, gold is also affected by inflation, wars, oil prices, and other factors, so you can’t look at the dollar index alone.

US Dollar Index vs US stocks

This relationship is more subtle; it’s not always positively or negatively correlated:

• Sometimes, dollar appreciation → capital inflow into the US → US stocks also rise
• But if the dollar becomes too strong → US export companies lose competitiveness → drag on the stock market

The real situation depends on the market context. During the pandemic, global stocks crashed, but the dollar appreciated due to safe-haven demand, showing an inverse relationship. After the Fed’s rescue measures, the dollar weakened, and US stocks rebounded strongly.

Conclusion: don’t just look at the one-way relationship between the dollar and US stocks; consider the overall economic environment and policy factors.

US Dollar Index vs Taiwan stocks / New Taiwan dollar

The most direct logic:

• Dollar appreciation → Capital flows back to the US → NT$ depreciates, selling pressure on Taiwan stocks increases
• Dollar depreciation → Capital flows into emerging markets → NT$ appreciates, Taiwan stocks benefit

But this isn’t an absolute rule. Sometimes, global optimism causes US stocks, Taiwan stocks, and the dollar to rise together; other times, black swan events trigger panic, and everyone falls together.

What forces drive the rise and fall of the US Dollar Index? Four major influencing factors

1. Federal Reserve’s interest rate policy (the most direct driver)

Rate hikes → US interest rates rise → global capital rushes into the US → dollar appreciates, index rises Rate cuts → Capital flows out of the US → dollar weakens, index falls

Every Fed meeting makes the market nervous because this power is huge.

2. US economic data

Employment data (non-farm payrolls, unemployment rate), CPI inflation, GDP growth, etc.

Strong data → US economy is robust → dollar strengthens Weak data → market confidence drops → dollar weakens

3. Geopolitical and international events

Wars, political turmoil, regional conflicts trigger risk aversion. During panic, the dollar is usually the first choice for safe-haven assets. So sometimes, “the more chaotic, the stronger the dollar” sounds contradictory, but it’s because of its safe-haven status.

4. Movements of other major currencies

The US Dollar Index is a relative measure. When the euro or yen weaken due to their own economic issues or loose policies, even if the dollar itself doesn’t move, the dollar index will rise.

Simply put: when other currencies fall, it also makes the dollar index look stronger.

US Dollar Index vs Trade-Weighted US Dollar Index: Which is more important?

Investors often only look at the “US Dollar Index,” but the Fed itself more often references another indicator—the Trade-Weighted US Dollar Index. What’s the difference?

US Dollar Index (DXY)

• The most common, most reported by media
• Only considers six major currencies
• Compiled by ICE (Intercontinental Exchange)
• Heavily weighted towards euro, reflecting Euro-American perspective

Trade-Weighted US Dollar Index

• The main reference for the Fed
• Weighted based on actual US trade partners
• Includes over 20 currencies, covering Asia and emerging markets (RMB, NT$, KRW, THB, etc.)
• More accurately reflects the dollar’s real strength in global trade

In a nutshell: If you are a retail investor, just watching the dollar index for big trends is enough. But if you want to analyze Fed policy logic or do professional forex trading, the trade-weighted index offers a more comprehensive view.

Summary: Use the US Dollar Index as your investment compass

The US Dollar Index is like a wind vane for global capital flows. When it rises, funds flow into the US; when it falls, hot money searches for other opportunities.

No matter if you invest in gold, US stocks, or Taiwan stocks, always pay attention to the dollar index’s movements. Master its logic, and you’ll understand many behind-the-scenes market trends.

Forex trading is similar. If you’re interested in trading the dollar index, platforms like Gate.io, which offer complete financial products, allow you to directly trade dollar index-related instruments, as well as other forex pairs, making your investment strategies more flexible and diverse.

The key point: Understanding the US Dollar Index means understanding the story of global capital flows.