Understand the US Dollar Index trend and grasp the key to global capital flow

Why Investors Must Pay Attention to the US Dollar Index

Have you noticed that whenever you hear “US dollar appreciation” or “US dollar strengthening,” the stock market starts to fluctuate, and capital flows also change? This is no coincidence.

US Dollar Index (USDX or DXY) is like a weather vane for the global financial markets. It’s not just a simple exchange rate; it’s a comprehensive indicator that reflects the relative strength of the US dollar against other major international currencies. For investors in Taiwan, whether you invest in US stocks, gold, or hold US dollar assets, you need to closely monitor the trend of the US Dollar Index.

Why? Because the strength or weakness of the US dollar directly determines whether your investment returns can be realized as expected.

The Essence of the US Dollar Index: What Exactly Is It Measuring?

The US Dollar Index tracks the exchange rate changes of the US dollar against six major currencies. These six currencies are:

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

Simply put, this index answers a core question: Is the US dollar stronger or weaker now compared to other major global currencies?

These six currencies represent over 24 developed countries, with the Eurozone covering 19 EU countries. Because it involves the world’s major economies, the US Dollar Index holds high authority in international financial markets.

The Calculation Logic Behind the US Dollar Index Trend

The US Dollar Index is calculated using a “geometric weighted average method,” not a simple average of the six currencies. This means each currency’s influence on the index is unequal—the Euro, with the largest weight, has the most direct impact on the US Dollar Index.

Key numerical understanding:

A higher US Dollar Index = a stronger dollar; a lower index = a weaker dollar

Understanding this is crucial because it determines how you interpret market news.

US Dollar Appreciation vs. Depreciation: Actual Impact on Investments

When the US Dollar Index rises

Dollar appreciation means the US dollar is worth more relative to other currencies. In this environment:

• Dollar-priced goods appear cheaper: international commodities like crude oil and gold will see their dollar prices decline
• Capital flows back to the US: US bond yields rise, US stock market becomes more attractive, and global hot money flows into the US markets
• Emerging markets face pressure: export-oriented countries like Taiwan and Southeast Asian nations see their competitiveness decline because their products become relatively more expensive when priced in dollars
• Foreign exchange risk emerges: if you hold US dollar assets, converting back to TWD will result in fewer dollars

When the US Dollar Index falls

A weakening dollar triggers a decline in market confidence, prompting investors to seek alternative opportunities:

• Capital flows favor Asia: hot money shifts to emerging markets and Asian stock markets, potentially attracting funds into Taiwan stocks
• New Taiwan dollar appreciates: import costs decrease, but export competitiveness also diminishes
• US dollar assets face depreciation pressure: your US stocks or dollar deposits converted back to TWD will shrink in value

How Does the US Dollar Index Trend Affect Other Assets?

Inverse relationship with gold

Gold and the US dollar often move like a “see-saw”:

• Strong dollar → higher cost to buy gold → gold prices fall
• Weak dollar → lower cost to buy gold → gold prices rise

However, this relationship is not absolute. Inflation expectations, geopolitical risks, and other factors can also influence gold’s movement.

US stocks do not necessarily move in the same direction

A rising dollar does not always boost US stocks; sometimes it even has the opposite effect:

• Excessive dollar appreciation can hurt US export profits, dragging down the overall stock market
• When the dollar depreciates, US companies’ overseas earnings in dollars increase when converted back, which can benefit stock prices

Therefore, the relationship between US stocks and the dollar depends on the current economic background and policy environment.

Sensitivity of Taiwan stocks and the New Taiwan dollar

The US Dollar Index trend directly impacts Taiwan’s investment environment:

• Dollar appreciation → capital flows back to the US → increased pressure on the TWD to depreciate → selling pressure on Taiwan stocks
• Dollar depreciation → capital flows into emerging markets → opportunities for TWD appreciation → positive for Taiwan stocks

But be aware that global risk sentiment can also break this pattern. During black swan events, stock markets, forex, and bond markets may all plunge together.

What Drives the Rise and Fall of the US Dollar Index?

Federal Reserve interest rate decisions

This is the most direct influencing factor.

Rate hikes → US interest rates rise → attract global capital inflows → US dollar appreciates Rate cuts → capital outflows → US dollar faces downward pressure

Every Fed meeting makes the market tense, and the reason is here.

US economic data

Employment data (non-farm payrolls, unemployment rate), CPI inflation figures, GDP growth rates, and other indicators are critical.

Strong data = US economy is robust = US dollar strengthens Weak data = market confidence declines = US dollar depreciates

Geopolitical risks and risk aversion

Wars, political turmoil, regional conflicts trigger global risk-off modes. Interestingly, the US dollar often becomes the preferred safe-haven asset, so the more chaotic the market, the stronger the dollar tends to be.

Performance of other major currencies

The US Dollar Index is a relative measure. When the euro, yen, or pound weaken due to their own economic issues, even if the dollar remains unchanged, the US Dollar Index can still rise.

US Dollar Index vs. US Dollar Trade-Weighted Index: Which Is More Important?

Many people only look at the US Dollar Index, but the Federal Reserve (Fed) actually references the US Dollar Trade-Weighted Index more often.

US Dollar Index (DXY):

• The most common, most reported indicator
• Created by ICE (Intercontinental Exchange)
• Covers only six currencies, with over half weight on the euro
• More Euro-American perspective

US Dollar Trade-Weighted Index:

• The main reference tool for the Fed
• Weighted based on actual US trade partners
• Includes 20+ currencies, such as RMB, Korean won, TWD, and other Asian currencies
• Provides a more accurate reflection of the dollar’s global strength

If you are a general investor, tracking the US Dollar Index is sufficient. But if you are doing macro analysis, forex trading, or want to understand Fed’s logic deeply, the trade-weighted index offers a more comprehensive picture.

How Can Investors Use the US Dollar Index Trend?

• Regularly monitor the index data: understand whether the dollar is in an appreciation or depreciation phase
• Combine with economic calendar: watch for Fed meetings, employment data, CPI releases
• Observe multi-asset correlations: when tracking the dollar index, also pay attention to gold, US stocks, and Taiwan stocks
• Assess exchange rate risks: when holding US dollar assets, consider the potential loss from dollar depreciation
• Seize capital rotation opportunities: the turning point from dollar appreciation to depreciation is often a buying signal for Asian stocks

While the US Dollar Index may seem complex, it’s essentially a weather vane for global capital flows. Mastering its change logic can help you respond more intelligently to market fluctuations.