The US Dollar Index (DXY) and Currency Strength Explained

The US Dollar Index (DXY) measures the value of the US dollar against a basket of six major currencies, with the euro making up about 58% of the basket, so it moves largely as the mirror image of EUR/USD. A currency strength meter goes further by ranking each major currency by its average move against all the others. Together they answer a question every forex trader needs to ask: is this pair moving because of the first currency, the second, or both?

What the Dollar Index is

The DXY was created in 1973 with a starting value of 100, and is now calculated by ICE (Intercontinental Exchange). A reading of 105 means the dollar is about 5% stronger against the basket than in March 1973. Its weights have not changed since the euro replaced several European currencies in 1999:

Currency	Weight
Euro (EUR)	57.6%
Japanese yen (JPY)	13.6%
British pound (GBP)	11.9%
Canadian dollar (CAD)	9.1%
Swedish krona (SEK)	4.2%
Swiss franc (CHF)	3.6%

Notice what is missing: the Chinese yuan, the Mexican peso, and the Australian and New Zealand dollars, among others. The DXY reflects trade patterns of the 1970s. For a broader picture, the Federal Reserve publishes trade-weighted dollar indexes covering many more currencies.

How traders use the DXY

• Big-picture dollar trend: a rising DXY in a clear trend tells you the market favours the dollar; trading against it on the majors means swimming upstream.
• Confirmation: if you are short EUR/USD and long USD/JPY and DXY is breaking higher, your trades share the same driver. That is also a warning that they are one bet, not two (see Forex Correlations).
• Other markets: a strong dollar often coincides with pressure on gold, many commodities, emerging-market currencies and, at times, crypto, although these relationships vary over time. The DanioX dollar index and crypto page tracks how the DXY trend lines up with the crypto market.

Currency strength: beyond the dollar

The DXY only looks at the dollar. A currency strength meter measures all eight major currencies (USD, EUR, JPY, GBP, CHF, AUD, NZD, CAD) against each other using the 28 pairs they form.

For each currency, take its percentage change against each of the other seven over a period (a day, a week, a month), turned so that the currency is the one being bought, and average them. A positive score means it rose against most others; a negative score means it fell.

The scores always add up to roughly zero, because every pair has a winner and a loser.

How to use a strength ranking

1. Diagnose a move: before buying GBP/USD because "the pound is strong", check whether it is really the dollar that is weak. If the dollar turns, every dollar pair turns with it.
2. Pick cleaner pairs: pairing the strongest currency with the weakest often shows the clearest trend. Pairing two currencies of similar strength usually gives a choppy range.
3. Avoid doubling up: if your three open trades are all "short dollar", strength analysis makes that obvious.

The DanioX forex market page shows a live strength ranking of the eight majors, calculated as the average move of each currency against the other seven, alongside the DXY-related view on the dollar index page.

Practice

Each Friday for a month, write down the strongest and weakest currencies of the week and the reason (central bank, data, risk mood). Then check whether the ranking held the following week. This builds an intuition for which moves are driven by lasting forces, such as interest rates, and which are noise.

Next: measuring how pairs move together in Forex Correlations.