How to Read the Dollar Index (DXY)

The Dollar Index is an indicator that shows in a single number how strong the U.S. dollar is compared to major developed-country currencies. Its ticker symbol is DXY, so it's commonly called 'DXY,' with the nickname 'Dixie.'

It started at a base value of 100 in March 1973, right after the collapse of the gold standard (the Bretton Woods system). So if DXY is now above 100, you can roughly read it as 'the dollar has strengthened since 1973,' and below 100 as 'it has weakened.'

Today, an exchange called ICE (Intercontinental Exchange) creates, manages, and publishes the index. 'U.S. Dollar Index' is also a registered trademark.

The DXY is calculated by comparing the dollar to exactly 6 currencies. Each currency's weight is as follows.

① Euro (EUR) 57.6% ② Japanese yen (JPY) 13.6% ③ British pound (GBP) 11.9% ④ Canadian dollar (CAD) 9.1% ⑤ Swedish krona (SEK) 4.2% ⑥ Swiss franc (CHF) 3.6%

As you may have noticed, the euro's weight of 57.6% is over half. So the DXY can practically be seen as moving inversely to 'the euro against the dollar.' When the euro weakens, DXY rises.

These 6 were set when the index was designed in 1974, and after that they changed only once, in 1999, when several European currencies were unified into the euro. One important point—the Korean won (KRW) is not in the basket, and neither is the Chinese yuan (CNY). So the DXY is an indicator of 'the dollar's strength against developed-country currencies'; it does not directly show our won-dollar exchange rate.

Looking at the DXY's history, you can really feel how greatly the dollar has swung.

The all-time high was about 164.72 in February 1985. At the time, the U.S. had raised its benchmark rate into the 20% range to tame the murderous inflation of the 1970s (the Volcker era), and as money chasing high rates poured into the dollar from around the world, the index soared. Then in September 1985, the U.S., Japan, West Germany, France, and the U.K. (the G5) jointly agreed to lower the dollar, saying it was 'too strong'—that famous agreement is the Plaza Accord. After that, DXY was cut roughly in half over several years, down to around 85.

Conversely, the all-time low was about 70.7 in March 2008. During the period when the housing and credit bubbles were bursting, trust in the dollar was greatly shaken and the index hit bottom.

More recently, it jumped quickly from about 89 in early 2021 to about 114 in September 2022. As the U.S. rapidly raised rates to tame post-COVID inflation, money poured into the dollar again. It was the fastest strong-dollar phase since the 1980s.

When you invest in U.S. stocks or U.S. ETFs from Korea, your return is determined by 'stock price change × exchange rate change' multiplied together. The DXY is a compass for reading the broad direction of this exchange-rate wave.

In a phase where the dollar strengthens (DXY rising), you can benefit from the exchange rate when converting U.S. assets into won. Conversely, when the dollar weakens (DXY falling), your won return can be shaved even if the stock price rises.

But here's a caution. As seen earlier, the won is not in the DXY basket, so DXY and the won-dollar rate don't always move together. The DXY is only a reference indicator for 'whether there's a strong-dollar trend globally'; it cannot substitute for the won-dollar rate.

And no one can predict exchange rates accurately. Rather than trying to guess the direction, it's far more practical to 'confirm with records' how much the exchange rate affected your return.