Dollar index

A weighted average of the dollar's exchange rates against several currencies at once, published as an index level rather than as a price. Any individual pair mixes two stories, since a rising rate can mean a stronger dollar or a weaker counterpart. A basket measure separates them by averaging the counterparts away, which is the whole reason such an index exists.

The one quoted most often is the US Dollar Index, a geometrically weighted measure against six currencies with the euro carrying more than half the weight, scaled from a base date in the early nineteen seventies. Other dollar indices exist and are built differently: the Federal Reserve publishes trade weighted indices covering a far broader set of partners, with weights revised as trade patterns change.

Two cautions follow from the construction. The widely quoted index is overwhelmingly a European measure, so it can describe a strengthening dollar while the dollar is falling against Asian or emerging currencies, and headlines about dollar strength usually mean that one basket. And an index is the output of a calculation rather than an asset: nothing is bought at an index level, and any instrument written on one references a futures contract or a fund built to follow it.