USD Index: A Cheat Sheet

What is the USD Index?

The USD index (DXY) is the relative indicator of the Dollar’s strength versus a subset of other major global currencies. Developed by the US Fed in the 70’s, DXY is the go-to measure of the state of major currencies and economies around the globe.

The index is derived from a weighted average of USD value against EUR, JPY, GBP, CAD,SEK and CHF with the majority of the average (57%+) being compared to EUR.

What is going on lately?

Over the past 12 months, the global economy has been in constant flux due in large part to COVID recovery, the ongoing conflict in Ukraine and general economic uncertainty in major countries around the world. When there is global economic volatility, the USD strengthens as it is seen as a safe-haven for investors. As such, the Dollar Index chart has spent a year looking much like the Yodeling Game on the Price is Right. (I can’t be the only one that remembers this game).

But is the cliff approaching? There are a few indicators to keep your eye on for both positive and negative movement from the Dollar Index. While it is impossible to predict exactly what the movement will be, it is important to monitor a few factors.

Key factors driving DXY upwards

-          Global economic uncertainty drives investors to USD as a safe-haven currency.

-          Uncertainty around where peak inflation will be found is supporting USD.

-          Weakening economic growth outlook in Europe and China will continue to bolster DXY.

-          US consumers seem to be unfazed by higher retail prices, forcing FED to accelerate rate hikes.

-          Aggressive rate hikes from the Fed, indicate commitment to slowing inflation which again strengthens USD.

Potential Threats to DXY

-          Eurozone economic recovery (can it be done, and how quickly?)

-          Strengthening Crude and other commodity prices drive CAD into higher zone.

-          Easing of supply chain issues will support outside economies.

-          When Fed determines that peak inflation has arrived, rate hikes will slow and USD will weaken.

-          Central banks begin to shift away from USD assets into more traditional assets (read: Gold)

Summary:

-          DXY is soaring over the past 12 months, but is a cliff is on the horizon?

-          Global economic uncertainty: DXY Strengthens

-          No signs of positive outlook in the Eurozone: DXY strengthens

-          Where is peak inflation in the US? Once found: DXY weakens

-          Supply chain easing, growth in China: DXY weakens

-          Commodity prices increase: DXY weakens