US Dollar Index – USDX

The USD Index measures the performance of the U.S. dollar against a basket of currencies: EUR, JPY, GBP, CAD, CHF and SEK. A measure of the value of the U.S. dollar relative to majority of its most significant trading partners. This index is similar to other trade-weighted indexes, which also use the exchange rates from the same major currencies. Currently, this index is calculated by factoring in the exchange rates of six major world currencies: the euro, Japanese yen, Canadian dollar, British pound, Swedish krona and Swiss franc.

It is a weighted geometric mean of the dollar's value compared only with:
. Euro (EUR), 57.6% weight
. Japanese yen (JPY), 13.6% weight
. Pound sterling (GBP), 11.9% weight
. Canadian dollar (CAD), 9.1% weight
. Swedish krona (SEK), 4.2% weight and
. Swiss franc (CHF) 3.6% weight.

The makeup of the "basket" has been altered only once, when several European currencies were subsumed by the Euro at the start of 1999. This index started in 1973 with a base of 100 and is relative to this base. This means that a value of 120 would suggest that the U.S. dollar experienced a 20% increase in value over the time period. It is possible to incorporate futures or options strategies on the USDX. These financial products currently trade on the New York Board Of Trade.

The diminishing dollar

One of the few calamities that has not befallen the world economy during the past two years is a dollar crash. Between September 2008 (when Lehman Brothers failed) and March 2009 (when America’s stock markets hit bottom), the dollar rose by almost 13% on a trade-weighted basis. For the past six months the greenback has been sinking steadily, hitting a 14-month low against a basket of leading currencies. A weaker dollar should also assist global economic rebalancing by helping to reorient America’s economy towards exports. So in general, it should help rather than hinder the global recovery. Is it the end of America’s status as the world’s reserve currency?
(From The Economist)