Trade Weighted US Dollar Index: Broad, Goods and Services

2022년 11월 20일

❓How long will the dollar appreciate?

🏦 The Federal Reserve dollar indexes are designed to help estimate the overall effects of U.S. dollar exchange rate movements on U.S. international trade.

📈 There are three indexes:
(1) the broad dollar index (this index), which is constructed using the currencies of the most important U.S. trading partners by volume of bilateral trade,
and two sub-indexes, which split the currencies in
(2) the broad index into advanced foreign economies (AFE) and
(3) emerging market economies (EME).

The broad dollar index contains the currencies of 26 economies for which bilateral trade with the United States accounts for at least 0.5 percent of total U.S. bilateral trade.

It includes the Euro Area, Canada, Japan, Mexico, China, United Kingdom, Taiwan, Korea, Singapore, Hong Kong, Malaysia, Brazil, Switzerland, Thailand, Philippines, Australia, Indonesia, India, Israel, Saudi Arabia, Russia, Sweden, Argentina, Venezuela, Chile and Colombia.

🤔 Trade-Weighted Dollar Index vs. the U.S. Dollar Index (DXY or USDX)

Created in 1973, DXY is composed of a basket of six currencies:
Euro (EUR), Japanese yen (JPY), British pound (GBP), Canadian dollar (CAD), Swedish krona (SEK), and Swiss franc (CHF).

💶 The EUR is, by far, the largest component of the index, making up almost 58% (officially 57.6%) of the basket.
The weights of the rest of the currencies in the index are:
JPY (13.6%), GBP (11.9%), CAD (9.1%), SEK (4.2%), CHF (3.6%).

When the Fed introduced the Trade Weighted Dollar Index, it hoped to create a better alternative to the USDX, namely by using more currencies and periodically reviewing the index's composition.

📚 More info:
fred.stlouisfed.org/series/DTWEXBGS
federalreserve.gov/econres/notes/feds-notes/revisions-to-the-federal-reserve-dollar-indexes-20190115.html
investopedia.com/terms/t/trade-weighteddollar.asp