U.S. Dollar Index®: What It Is and Its History

Definition: The U.S. dollar index® is measurement of the dollar's value according to a basket of six exchange rates. Over half of the value is the dollar's value measured against the euro. The other five currencies are the Japanese yen, the British pound, the Canadian dollar, the Swedish krona and the Swiss franc. 

The formula is:

USDX = 50.14348112 × EURUSD ^-0.576 × USDJPY ^0.136 × GBPUSD ^-0.119 × USDCAD ^0.091 × USDSEK ^0.042 × USDCHF ^0.036

The value of each currency is multiplied by its weight. Note that the weight is a positive number when the U.S. dollar is the base currency, and negative when the U.S. dollar is the quote currency. Euros and pounds are the only two where the U.S. dollar is the base currency. That's because they are quoted in terms of dollar. For example, a euro is worth $1.13. The other four are quoted in terms of how many a U.S. dollar will buy. For example, a dollar is worth 109 yen. (Source: "U.S. Dollar Index® Contracts," ICE Futures U.S., June 2015.)

History

In 1973, the Federal Reserve created the index to keep track of the dollar's value. It was right after President Nixon abandoned the gold standard that year. It allowed the value of the dollar to float freely in the world's foreign exchange markets. Before the creation of the dollar index, the dollar was fixed at $35/ounce of gold. It had been that way since the 1944 Bretton Woods Agreement.

The dollar index began at 100. The index has measured the percent change in the dollar's value since then. It changes constantly in reaction to shifts in the ongoing forex trades. For example, its all-time high was 163.83 on March 5, 1985. That meant the dollar was 63.83 percent higher than in 1973.

Its all-time low was 71.58 on April 22, 2008. That meant it was 28.42 percent lower than its inception. (Source: "DX.F" from Stooq.com. "USDX," ICE Futures.com.)

In 1985, the ICE Futures U.S. took over the management of the USDX. That's the year that futures trading on the USDX began. 

Historical Data

Here is U.S. dollar index® historical data, as measured by the DXY, for the last 10 years.

2007: The dollar's value, as measured by the DXY spot price,  was 76.20 on December 31.

2008: The dollar ended the year at 82.15 after falling to a low of $72.17 on March 31, 2008. That was shortly after the Bear Stearns bailout signaled damage from the Subprime Mortgage Crisis. At that time, investors thought it only affected the U.S., and bought euros. By the end of the year, it was clear the 2008 financial crisis was worldwide. The Fed lowered the fed funds rate 8 times. It initiated quantitative easing on November 25. Investors returned to the dollar as a safe haven.

2009: The DXY ended the year at 77.92. Dollar fell as euro rose once the European Central Bank began lowering rates.  

2010: The DXY rose to 86.04 on June 30, but ended the year at 78.96 despite Fed's launch of QE 2 on November 3.

2011: The DXY fell to 74.52 on June 30 due to U.S. debt default crisis.

Investors returned to the dollar due to eurozone crisis. Fed launched Operation Twist in September.  DXY ended the year at 80.21.

2012: Fed announced QE3 on September 13 and QE4 in December. The DXY closed at 79.678.

2013: On June 19, Fed Chair Bernanke announced the Fed would taper off QE purchases. Investors sold bonds in a panic, driving the yield on the 10-year Treasury note up 1 percent. The Fed delayed tapering until December. The DXY closed the year at 80.392. 

2014:  The dollar remained stable for the first six months, hitting 80.187 on July 11. The Ukraine crisis and Greek debt crisis drove investors out of the euro and into the dollar as a safe haven. The Fed ended QE in October. It held an unprecedented $4.5 trillion in Treasury notes.  It announced it would raise the fed funds rate in 2015.