InvestorQ : What is the Dollar index and why is it important to track the dollar index?
shrinidhi Rajan made post

What is the Dollar index and why is it important to track the dollar index?

Answer
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Riya Dwivedi answered.
2 years ago


Globally, one of the most significant factors impacting the value of the rupee is the dollar index. The dollar index (DXY) is an index of dollar strength weighed against a basket of hard currencies. This dollar index is calculated by Bloomberg and is used as a benchmark by most traders and analysts to weigh the strength of the currencies. Therefore the dollar index is not only about the strength of the dollar but also the weakness of the other hard currencies vis-a-vis the dollar.

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Source: Bloomberg

The chart above depicts the USD-INR rate plotted with the dollar index (DXY) over the last five years. During most of this period they have tended to perform in sync with one with one another barring some minor divergences. The dollar index took a long time to cross the 100 mark; but post January 2017 the DXY has been on a consistent downtrend that has resulted in strengthen of the rupee. There are also extraneous factors that impact the INR due to the dollar index. For example, when the Yen, due to its current account surplus, emerges as a safe haven currency, the yen appreciates versus the dollar. This also strengthens the INR due to weakness in the dollar index. Similarly, when Europe got into trouble during the peak of the Greek crisis in 2014, the Euro weakened sharply against the USD. This led to a sharp weakening of the INR vis-à-vis the dollar although there was nothing much that had fundamentally changed in the Indian fundamentals.