There is also another kind of U.S. dollar index.
It was created by the Federal Reserve and is now used widely by lots of sexy people, like economists and currency analysts.
It is called the “Trade Weighted U.S. Dollar Index“.
What is the Trade Weighted Dollar Index?
The Trade Weighted Dollar Index is a measure created by the Federal Reserve to track the value of the U.S. dollar (USD) relative to a basket of foreign currencies.
Unlike simple currency comparisons, this index weights each currency according to the volume of trade the U.S. conducts with the corresponding country, making it a more accurate reflection of the dollar’s international competitiveness
You can find it on the Federal Reserve Economic Data (FRED) website here.
Their website is probably one of the most beautiful websites ever made…
Just kidding. It’s a government website.
Beautiful? Like lipstick on a pig.
Useful? Hell yeah. 👍
Why Was It Created?
The trade-weighted US dollar index, also known as the Nominal Broad U.S. Dollar Index, is a measure of the value of the U.S. dollar relative to other foreign currencies.
The Federal Reserve introduced the Trade Weighted Dollar Index in 1998 to better capture the changing landscape of U.S. trade, especially after the introduction of the euro, which replaced several European currencies.
It is a trade-weighted index that tries to improve on the older AND privately-owned ICE U.S. Dollar Index (USDX) by using more currencies and updating the weights yearly.
The Fed wanted to create an index that could more accurately reflect the dollar’s value against foreign currencies based on how competitive U.S. goods are compared to goods from other countries.
It was formed in 1998 in order to keep up-to-date with U.S. trade.
How to Interpret the Index
- Rising Index: The U.S. dollar is strengthening relative to its trading partners, making imports cheaper and exports more expensive for foreign buyers.
- Falling Index: The dollar is weakening, making U.S. exports more competitive but imports more costly
Movements in the index can signal shifts in the dollar’s value against major trading partners, impacting the cost of imports and exports.
How does the Trade-Weighted U.S. Dollar Index work?
The Federal Reserve Bank of St. Louis provides “weighted averages of the foreign exchange value of the U.S. dollar against the currencies of a broad group of major U.S. trading partners.”
The index includes 26 currencies, representing countries that account for about 90% of total U.S. trade.
Each currency’s weight in the index is determined by the share of U.S. trade with that country.
For example, if the U.S. trades more with China than with Switzerland, the Chinese yuan will have a higher weight than the Swiss franc.
The index is calculated as a geometric mean of the exchange rates, with each rate raised to the power of its trade weight
From strongest to weakest, here is the current weighting (in percentage) of the index:
| Country | Weight(%) |
|---|---|
| Eurozone | 18.947 |
| China | 15.835 |
| Canada | 13.384 |
| Mexico | 13.524 |
| Japan | 6.272 |
| United Kingdom | 5.306 |
| Korea | 3.322 |
| Taiwan | 1.95 |
| Singapore | 1.848 |
| Brazil | 1.979 |
| Malaysia | 1.246 |
| Hong Kong | 1.41 |
| India | 2.874 |
| Switzerland | 2.554 |
| Thailand | 1.096 |
| Australia | 1.395 |
| Russia | 0.526 |
| Israel | 1.053 |
| Sweden | 0.52 |
| Indonesia | 0.675 |
| Saudi Arabia | 0.499 |
| Chile | 0.625 |
| Philippines | 0.687 |
| Colombia | 0.604 |
| Argentina | 0.507 |
| Total | 100 |
*Weights as of December 16, 2019
The main difference between the USDX and the trade-weighted U.S. dollar index is the basket of currencies used and their relative weights.
The trade-weighted index includes countries from all over the world, including some developing countries.Given how global trade is developing, this index is probably a better reflection of the U.S. dollar’s value across the globe.
The weights are based on annual trade data.
- Weights for the broad index can be found at https://www.federalreserve.gov/releases/H10/Weights/.
- If you’d like to see historical data, check out https://www.federalreserve.gov/releases/h10/Summary/.
How is it different from the U.S. Dollar Index (USDX)?
| Feature | Trade Weighted Dollar Index (Fed) | U.S. Dollar Index (USDX) |
|---|---|---|
| Number of Currencies | 26 | 6 |
| Major Currencies Included | Both developed and emerging | Only developed |
| Weighting Method | Based on U.S. trade volume | Fixed weights |
| Updates | Annually (weights), daily (value) | Rarely |
- The USDX, created in 1973, only includes six major currencies (euro, yen, pound, Canadian dollar, Swedish krona, Swiss franc) and is heavily weighted toward the euro.
- The Trade Weighted Dollar Index offers a broader and more current picture of the dollar’s value in global trade
As you can see, the Trade Weighted Dollar Index by the Federal Reserve is useful for understanding how the U.S. dollar is performing against a broad set of global currencies, weighted by actual trade relationships.
It offers a more nuanced and practical view than older, narrower indices, and is widely used for economic analysis and policy decisions.