Established in 1973 by the Federal Reserve Bank in the United States, the US Dollar Index is the comparison of six global currencies against the US dollar. The six currencies included in the index are the euro, the British pound sterling, the Japanese yen, the Swedish krona, the Swiss franc and the Canadian dollar. The performance of each of these currencies is compared against the US Dollar Index, which is updated several times each weekday.
In financial circles, the US Dollar Index is referred to by the abbreviation USDX, which is also how the index is abbreviated on various ticker tape market exchanges. It is perhaps best described as the comparative US dollar performance. While the USDX is closely monitored each day by financial experts, foreign exchange analysts, governments and currency traders, it is most closely watched during times of financial stress as an indicator of how healthy or weak the global economy is. The index is also on a constant cycle of calculating 24 hours per day each weekday.
The genesis of the US Dollar Index can be traced to the dismantling of the Bretton Woods Agreement, which took place in the early 1970s. This agreement, which had previously supported a fixed exchange, was found to be impractical since it was impossible for the American dollar to be fixed, while at the same time allowing a free capital system to exist. The US dollar was also negatively affected by the Vietnam War and a lack of gold backing that country’s currency. The result of this dismantling was the US Dollar Index by which the future trading value of foreign currency would be determined by its comparison to US currency.
Although the US Dollar Index only involves the comparison of six global currencies, these six currencies actually represent 21 countries. This is because 16 countries use the euro as standard currency. Since the euro represents so many different countries, it is also considered the largest currency in the US Dollar Index grouping.
While the US Dollar Index is comprised of only six currencies representing 21 different countries, other countries also pay very close attention to the index. For the same reasons that currency traders and others watch the index for telltale signs of the global economy’s health, other countries who utilize other currencies do the same. When the US dollar rises or falls, it is a good indication of how well or how poorly other currencies are doing whether they are a part of the index or not.