Understanding the US Dollar Index

The US Dollar is normally the base currency in the FX world while other hard currencies such as the euro, British pound and Japanese yen might sometimes being used as the base. A base currency means the first currency pair in a FX conversion. For example, if you want to convert SGD into GBP, your SGD will convert into USD and then from USD convert into GBP. In fact, when someone describes if a currency appreciates or depreciates, it is always with respect to the USD. For example, GBP is moving up from 1.24 to 1.27. It means the GBP is appreciating from 1 GBP to 1.24 USD to 1 GBP to 1.27 USD. Alternatively, SGD is moving down from 1.36 to 1.35. It means that SGD is appreciating from 1.36 SGD to 1 USD to 1.35 SGD to 1 USD.

When the movement of most of the currencies is referencing to the USD, what is the meaning of an appreciation or depreciation of the USD? In practice, the movement of the USD normally refers to the movement of the US Dollar Index. The US Dollar Index (or “The Dollar Index”) start with a base value of 100 in 1973 and it is a relative measure of the USD against a basket of currencies. It includes the euro, British pounds, Japanese yen, Canadian dollar, Swedish kronor and Swiss franc. Table 1 shows the weightage of each of the six constituents in the Dollar Index. In which, it shows that the euro has the heaviest weightage followed by the Japanese yen and British pounds. All these three currencies already accounted for more than 80% of the Index and hence, it is fair to say that their movement against the USD will set the direction of the Index.

Table 1: The Dollar Index Constituents

Constituents	Weightage
EUR	57.6%
JPY	13.6%
GBP	11.9%
CAD	9.1%
SEK	4.2%
CHF	3.6%

The Dollar Index has increased from 101.33 to 106.22 year-to-date as of the end of April. It means the USD appreciated 4.8% against the weighted average of these six currencies. Although there are no Asian or emerging markets currencies in the Dollar Index’s basket, it remains a good reference that when the Dollar Index is appreciating, it also means the USD is generally appreciated against other major and Asian or emerging markets currencies.

Chart 1: The Dollar Index movement in the past 24 years

Source: Bloomberg

Chart 1 shows the Dollar Index movement since April 2000. It experienced a long downtrend from year 2002 to 2007, right before the Global Financial Crisis. The Dollar Index also started another rally together with the Fed rate hike cycle since 2022. Moving forward, apart from persistently elevated inflation, US economic activity remains robust, while the labour market also continues to look fairly tight. We hold a view that the interest rate in the US will stay higher for longer, it might also hint that the Dollar Index remains at the relatively higher level for a long period.