Recently, I’ve noticed many people discussing how the rise and fall of the U.S. dollar index affects investments, and I thought: instead of waiting for others to explain it, I’d rather figure out what this indicator is actually doing myself.

To be honest, the U.S. Dollar Index (USDX) may seem complicated, but the core idea is actually pretty straightforward. You know how the stock market has indices like the S&P 500 and the Dow Jones that track stock performance, right? The U.S. dollar index follows the same logic—except it doesn’t track stocks. It tracks changes in the exchange rate of the U.S. dollar against six major currencies. These six currencies are the euro, the Japanese yen, the British pound, the Canadian dollar, the Swedish krona, and the Swiss franc.

In simple terms, the dollar index tells you one thing: whether the U.S. dollar is strengthening or weakening relative to other international currencies. You can think of it as a thermometer for global financial markets, because the U.S. dollar is the world’s primary trading currency—almost all commodities, energy, and gold are priced in dollars.

I’ve noticed many investors ask what it really means when the dollar index rises or falls. The impact is actually quite significant. When the dollar index increases, it means the U.S. dollar has appreciated; correspondingly, other currencies depreciate. This can make dollar-priced commodities (such as crude oil and gold) look cheaper, but it’s not very optimistic for an export-driven economy like Taiwan—because goods become more expensive and harder to sell to the United States. Conversely, when the dollar index falls, the U.S. dollar weakens, and hot money may leave the U.S. and flow into Asian stock markets or emerging markets, which is usually a positive for Taiwan stocks.

To understand the dollar index’s weightings, things get even more interesting. It isn’t calculated as an average of the six currencies. Instead, it is weighted based on each country’s economic size and trading volume. The euro has the highest weighting, at over 57%, because the eurozone has many countries and a large economy, making it the second-largest international currency after the U.S. dollar. The Japanese yen ranks second, at about 13.6%, because Japan is the world’s third-largest economy. The British pound, Canadian dollar, Swedish krona, and Swiss franc combined account for less than 30%. So if you see the dollar index making violent swings, the first thing to check is whether there have been any major changes in the euro or the Japanese yen.

The dollar index is calculated using a geometric weighted average method, with a fixed constant included so that the starting point in 1985 is set to 100. This setup is important because the dollar index is not an exchange rate and not a price—it’s a relative index. A value of 100 means no change from the base period, 76 means it is down 24% compared with the base period, and 176 means it is up 76% compared with the base period. So, the higher the dollar index is, the stronger the U.S. dollar is.

When I’m investing, what I focus on most is the relationship between the dollar index and other assets. The relationship between the U.S. dollar and U.S. stocks is not simply a positive correlation or a negative correlation. Sometimes, a stronger U.S. dollar attracts capital inflows into the U.S., and U.S. stocks rise as well. But if the dollar becomes too strong, it can instead hurt U.S. export companies and drag down the overall stock market. During the global stock market crash in March 2020, the U.S. dollar surged to 103 due to safe-haven demand, but later, as the U.S. COVID-19 outbreak worsened and the Federal Reserve printed money aggressively to support the market, the dollar quickly weakened to 93.78.

The relationship between gold and the U.S. dollar is much clearer—basically the inverse. When the U.S. dollar is strong, the cost of buying gold with dollars increases, demand naturally declines, and gold prices tend to fall. The opposite is also true. For Taiwan stocks and the New Taiwan dollar, the general logic is that when the U.S. dollar appreciates, capital flows back to the U.S., the New Taiwan dollar may depreciate, and Taiwan stocks face more pressure. When the U.S. dollar depreciates, capital flows back into Asia, which is beneficial for the New Taiwan dollar to appreciate and for Taiwan stock performance.

There are several factors that influence changes in the dollar index. The most direct is the Federal Reserve’s interest rate policy: raising rates attracts global capital inflows into the U.S., strengthening the dollar; lowering rates may cause capital to flow out, weakening the dollar. U.S. economic data is also crucial—employment data, inflation data, GDP growth rate, and so on. If they look good, the dollar tends to strengthen. Geopolitics and international events affect global risk sentiment; during war or political turmoil, the U.S. dollar often becomes the first-choice safe-haven asset. In addition, the movements of other major currencies can indirectly affect the dollar index as well, because it’s a relative value—if other currencies depreciate, the dollar index can appear stronger.

One interesting aspect is that the Federal Reserve itself more often refers to the trade-weighted U.S. dollar index rather than the dollar index that we commonly look at. The dollar index is published by ICE and is mainly calculated using six currencies, with Europe having a significant influence, which makes it somewhat biased toward a Europe/U.S. viewpoint. The trade-weighted index includes more than 20 currencies, incorporating more currencies from Asian emerging markets. For example, the Chinese yuan, Korean won, and Taiwan dollar are included, which makes it closer to the actual U.S. trading partners and more aligned with the current state of the global market. If you’re just an ordinary investor, looking at the dollar index is enough. But if you want to dig deeper into Fed policy logic or do forex trading, the trade-weighted index gives you deeper reference value.

In the end, mastering changes in the dollar index is basic investment know-how. No matter whether you invest in U.S. stocks or gold, or whether you want to know whether the New Taiwan dollar will appreciate or depreciate next, fluctuations in the dollar index directly affect your investment decisions. Personally, I treat it as a barometer of global capital flows—by tracking its changes, I can judge asset values, assess risks, and even spot investment opportunities ahead of time. Especially in forex trading, the dollar index is an indispensable practical indicator.