US Dollar Index

The most quoted of the dollar indices. Its basket holds the euro, the Japanese yen, sterling, the Canadian dollar, the Swedish krona and the Swiss franc, each carrying a fixed weight, and the index is a geometric weighted average of the dollar's rate against them, multiplied by a constant that set the index to one hundred at its base period. A level above that base means the dollar is stronger against this basket than it was then, and nothing more than that.

Its weights are fixed rather than maintained. The basket has been altered once since it was created, when the euro replaced the legacy European currencies it succeeded, and the weights have otherwise stood still for decades while trade patterns have not. That is a design choice with a purpose, since a fixed basket makes the series comparable across its whole history, and it is also the source of the index's principal limitation.

Two things are commonly misread. Because the euro dominates the basket, the index is close to a European measure of the dollar wearing a broader name: it can rise while the dollar is falling against Asian and emerging market currencies, so a headline about dollar strength is usually a statement about this one basket. And it is not a trade weighted measure of what the dollar buys from the countries the United States actually trades with, since several of the largest of those are absent from it; the Federal Reserve's broad trade weighted indices cover them and are reweighted as trade shifts, and they can move differently over the same period. Which measure deserves the name of the dollar is a genuine and unsettled difference between market commentary and economic statistics.