Global Capital Indicator: An In-Depth Analysis of How the US Dollar Index Dominates the Market

Do you often see headlines like “Dollar Strengthens” or “Dollar Index Hits New High” in financial news, but find the indicator itself baffling? Actually, behind this seemingly complex number lies a secret about the flow of global capital. Today, let’s understand the true meaning of the US Dollar Index from the most straightforward perspective.

The Key Drivers Determining Forex Market Trends

Before making any investment decisions, one thing you must clarify: What is the real driver behind the fluctuations of the US Dollar Index?

The Federal Reserve’s interest rate policy is almost the most direct determinant. Rate hikes → increased attractiveness of the dollar → influx of hot money worldwide → rising dollar index; the logic is reversed for rate cuts. Every time the Fed meets, the market’s tension stems from this very reason.

In addition, US economic data (employment figures, unemployment rate, CPI inflation, GDP growth) also influence the strength of the dollar. Good data supports the dollar; poor data shakes market confidence, leading to dollar weakness.

Geopolitical events and risk aversion also play critical roles. When wars, political crises, or regional conflicts occur, markets instinctively seek safe-haven assets. At such times, the dollar often becomes the preferred refuge due to its status as an international reserve currency. So sometimes, “chaos actually pushes up the dollar,” which may seem contradictory but is reasonable.

What Exactly Does the US Dollar Index Measure?

The US Dollar Index (USDX or DXY) is not baseless; it is a systematic measurement tool. Simply put, the dollar index is like a thermometer for the global financial market—it tracks the relative strength of the dollar against six major international currencies.

These six currencies are:

• Euro (EUR): the largest weight, about 57.6%
• Japanese Yen (JPY): about 13.6%
• British Pound (GBP): about 11.9%
• Canadian Dollar (CAD): about 9.1%
• Swedish Krona (SEK): about 4.2%
• Swiss Franc (CHF): about 3.6%

Why these six? Because they represent economies with large scales and ample trading liquidity. The euro alone covers 19 EU member countries, with a total weight exceeding 24 developed nations. This explains why the dollar index holds such authority in the international financial arena.

The Calculation Logic Behind the Numbers

The dollar index uses a “geometric weighted average” method, involving each currency’s exchange rate and its respective weight. But more importantly, understand that the dollar index is not an exchange rate or an absolute price; it is a relative index.

How to interpret it?

• Index value = 100 indicates the baseline period, no change
• Index value = 76 indicates a 24% decline from the baseline, meaning the dollar has weakened
• Index value = 126 indicates a 26% increase from the baseline, meaning the dollar has strengthened

The higher the dollar index, the more stable the dollar’s international position; the lower, the more it loses its appeal globally.

The Actual Impact of Rising or Falling Dollar Index

When the dollar index rises

This means the dollar is appreciating relative to other currencies. In economic terms, “the dollar appreciates, other currencies depreciate.” Since many international commodities (oil, gold, bulk commodities) are priced in dollars, a rising dollar increases their “dollar purchasing power.”

This benefits the US economy: import costs decrease, and foreign capital flows in due to the attractive yields of dollar assets (US Treasuries, US stocks).

But for export-oriented economies (like Taiwan), it’s a challenge: product prices rise relative to competitors, reducing international competitiveness; emerging markets with dollar-denominated debt face increased repayment pressure.

When the dollar index falls

The dollar weakens, prompting market investors to withdraw from dollar assets and seek opportunities in emerging markets or other assets.

Impacts on Taiwan may include:

• Hot money flowing into Taiwan stocks, supporting prices
• New Taiwan dollar appreciating, lowering import costs but weakening export competitiveness
• Holders of dollar assets facing exchange loss risks

The Interaction Between the Dollar Index and Global Assets

Relationship with US stocks

They are not simply positively or negatively correlated; it depends on the market context:

• During rate hike cycles, dollar appreciation often attracts capital inflows into the US market, potentially boosting US stocks
• But if the dollar surges too much, it can hurt US exporters, dragging down stock performance

The 2020 experience is very typical. When global stocks plummeted early in the year, the dollar surged to 103 due to safe-haven demand; but as the pandemic worsened and the Fed adopted easing policies, the dollar index rapidly declined to 93.78.

Conclusion: The interaction between US stocks and the dollar is complex; you can’t judge it with a single line.

Relationship with gold

Gold and the dollar usually show an inverse relationship:

• Dollar index rising → gold priced in dollars increases → demand for gold decreases → gold prices fall
• Dollar index falling → gold purchasing power improves → demand for gold increases → gold prices rise

Of course, gold prices are also influenced by inflation expectations, geopolitical conflicts, real interest rates, and other factors, so it cannot be solely attributed to the dollar index.

Impact on Taiwan stocks and the New Taiwan Dollar

General patterns are:

• Dollar appreciation (index rising) → capital flows back to the US → Taiwan dollar faces depreciation pressure → Taiwan stocks come under pressure
• Dollar depreciation (index falling) → capital flows into Asia → Taiwan dollar appreciates → Taiwan stocks may profit

But these are not ironclad rules. Optimistic market sentiment can push global stocks, US stocks, Taiwan stocks, and the dollar to rise simultaneously; extreme risks may cause all assets to crash together.

The Difference Between the Dollar Index and the Trade-Weighted Index

Media often report the “Dollar Index” and the actual “US Dollar Trade-Weighted Index” referenced by the Federal Reserve, which can be confusing but are fundamentally different.

Dollar Index (DXY) features:

• The most common market indicator, compiled by ICE
• Tracks only six major currencies
• The euro’s weight is 57.6%, mainly reflecting Euro-American economic interactions
• Suitable for quick market sentiment assessment

Trade-Weighted Index features:

• The main reference tool for the Fed
• Includes over 20 currencies, such as RMB, Mexican Peso, Korean Won, Taiwan Dollar, Thai Baht, etc.
• Weighted based on actual US trade relationships
• More accurately reflects the dollar’s real position in global trade

Recommendation: For most investors, monitoring the dollar index is sufficient. But if you are involved in macroeconomic research, forex trading, or want a deeper understanding of Fed logic, the trade-weighted index is a more powerful reference.

Practical Insights

The value of the dollar index lies in providing investors with a window into global capital flows. The rise and fall of gold, crude oil, and various stock markets can, to some extent, be traced through fluctuations in the dollar index.

Mastering the trend of the dollar index, especially understanding the economic logic behind it (interest rate policies, economic data, geopolitical events), can help you better judge asset valuations, assess risks, and seize trading opportunities. Whether you are a long-term investor or a short-term trader, this is an essential skill.