What Is the Dollar Index?

The Dollar Index acts as a benchmark for the valuation of U.S. currency.

To analyze the performance of the U.S. dollar, the Dollar Index is used. The New York Board of Trade originally founded the Dollar Index in 1973 as a means of comparing the strength of the U.S. financial market against other foreign currencies.

Inceptions

In 1973, the base value of the U.S. dollar was set at 100 points. By comparing financial performance against foreign currencies, the Dollar Index was designed to give traders a distinct advantage in the international trading marketplace by highlighting when the dollar is at the strongest possible level. As the Dollar Index increases, so, too, does the power of the U.S. dollar rise.

Comparison

To establish the Dollar Index, the U.S. dollar is compared to currency from six other markets. The euro, UK pound, Swedish krona, Japanese yen, Swiss franc and Canadian dollar are all compared on the Dollar Index at proportional levels. The Dollar Index operates on a mathematical formula that uses predefined exponents applied against ongoing exchange rates.

Uses

Most significantly, the Dollar Index gives traders a clear representation of U.S. monetary strength, offering a number of advantages in international trading activities. Strong performance of the U.S. dollar can lead to huge profits in the buying and selling of futures, options and other mutual monetary funds.

References

• Forex Pros: U.S. Dollar Index Overview
• Investor Glossary: U.S. Dollar Index Definition