Dollar index
Also written US dollar index · DXY · Dollar index impact on commodities
A measure of the strength of the US dollar against six major currencies, used by commodity analysts as a single gauge of currency movement instead of tracking each one.
In plain language
Nearly all commodities are priced in US dollars. Crude oil, gold, silver, copper, farm goods — all quoted in dollars wherever they trade.
So the dollar itself moves commodity prices. A stronger dollar makes the same barrel of oil more expensive for a buyer paying in rupees or euros, even if the barrel has not changed at all.
But a commodity analyst cannot follow every currency in the world at once. The dollar index solves that. It compresses the dollar's strength against the major currencies into 1 number.
Watch the index, and you have a reading on the currency side of every dollar-priced commodity.
How it works
Why the dollar in the first place. Section 11.3 traces it. Cross-border commodity trade forces countries to receive one foreign currency and pay in another, and converting between them through the forex market creates currency risk. So, "as a convention", countries began quoting and settling in the most internationally acceptable and easily available currencies. The US dollar, "right from the post world war period", established itself as the most preferred internationally convertible currency and became the international reserve currency through the preference of many central banks. World commodity trade therefore quotes and trades in the US dollar, "then followed by Euro, as the two most preferred currencies".
Why an index was needed. Because the factors driving each of the major currencies — the workbook names the Euro, UK Pound and Japanese Yen — make it "complex for any analyst to assess their impact on commodity price movements". "Hence, the dollar index was discovered to gauge the overall currency movement."
The 6 currencies. The workbook is specific: "The dollar index is a measure of strength of U.S. Dollar against six major currencies viz., Euro, Japanese Yen, Pound Sterling, Canadian Dollar, Swedish Krona and Swiss Franc."
That list of 6 is the single most examinable fact in section 11.3. Note that the Chinese yuan and the Indian rupee are not in it.
The mechanism, in both directions.
| Dollar | Effect on non-dollar buyers | Global demand | Commodity prices |
|---|---|---|---|
| Strengthens | Commodities become more expensive | Reduced | Downward pressure |
| Weakens | Commodities appear cheaper | Encouraged | Driven upward |
The workbook's own illustration of the second row: "a weaker dollar often supports higher demand for gold and crude oil."
Two further consequences it draws out. Emerging markets with weaker domestic currencies "face higher import costs for dollar-denominated commodities, influencing inflation and consumption patterns". And commodity exporters may benefit when their local currency weakens, because "dollars revenues lead to more home currency revenues, when converted back."
The verdict. "In essence, the dollar index serves as a key barometer for commodity traders and investors."
A worked example
Illustrative, following the workbook's own mechanism. Crude oil trades at USD 80 a barrel and does not move all quarter. What moves is the dollar.
| Rupee at Rs 80 | Rupee at Rs 88 | |
|---|---|---|
| Crude price | USD 80 | USD 80 |
| Cost to an Indian refiner, per barrel | Rs 6,400 | Rs 7,040 |
The barrel costs an Indian buyer Rs 640 more, a 10% rise, with no change in the oil market whatsoever. On imports of 10 lakh barrels a month, that is Rs 64 crore a month of extra cost — the higher import cost and inflation pressure the workbook attributes to a weaker domestic currency.
Now the other side of the workbook's point. An Indian exporter of iron ore sells USD 25 million of ore in the same quarter.
At Rs 80 : USD 25 mn = Rs 200 crore
At Rs 88 : USD 25 mn = Rs 220 crore
The same shipment converts to Rs 20 crore more at home. One currency move, 2 opposite outcomes, depending on which side of the trade a company sits — which is why an analyst reads the dollar index before reading a commodity company's guidance.
Why NISM asks about it
Section 11.3 (Currency and dollar index impact on commodities) is named in the chapter's learning objectives as "Currency and dollar index impact on commodities", so it is squarely examinable.
The question to prepare for is the list of 6 currencies. After that, the direction question: a strengthening dollar puts downward pressure on commodity prices, a weakening dollar pushes them up. And a third on why the dollar is the pricing currency at all, where the answer is its status as the most preferred internationally convertible currency and the international reserve currency since the post-war period.
Common exam traps
- 6 currencies: Euro, Japanese Yen, Pound Sterling, Canadian Dollar, Swedish Krona, Swiss Franc. The Swedish Krona is the one candidates forget. The Chinese yuan and the Indian rupee are not in the index.
- A strong dollar is bearish for commodity prices; a weak dollar is bullish. Getting the sign wrong turns a correct mechanism into a wrong answer.
- The dollar index measures the dollar, not the commodity. Oil can rise in dollar terms while the index rises too; the index explains the currency part of the move, not all of it.
- The Euro is second, not absent. The workbook names the dollar and then the euro as the 2 most preferred currencies for quoting and trading commodities.
- A weak home currency hurts importers and helps exporters. The workbook makes both points, and a question may test either one.
- Do not confuse the dollar index with a commodity index. One tracks a currency against 6 others; the other tracks a basket of commodities.
Check yourself
1.The dollar index measures the strength of the US Dollar against how many major currencies?
- a)Four
- b)Six
- c)Ten
- d)Twelve
Show the answer
Answer: (b) Six
The dollar index is a measure of strength of U.S. Dollar against six major currencies viz., Euro, Japanese Yen, Pound Sterling, Canadian Dollar, Swedish Krona and Swiss Franc.
Why it exists: all those factors which influence each of the major currencies like Euro, UK Pound, Japanese Yen, make it complex for any analyst to assess their impact on commodity price movements. Hence, the dollar index was discovered to gauge the overall currency movement. It is an easy way to analyze the impact of significant international currencies on the prices of commodities.
Why the dollar in the first place: US Dollar, right from the post world war period, has established itself as the most preferred internationally convertible currency. It has assumed the importance as international reserve currency due to the preference by central banks of many countries. Therefore, commodities' trade across the world uses US Dollar, then followed by Euro, as the two most preferred currencies to quote and trade in the commodities.
The Swedish Krona is the member candidates most often forget, and the Australian Dollar and Chinese Yuan are the two most often wrongly added.
And why it matters: since most commodities — such as crude oil, gold, silver, and agricultural products — are priced and traded internationally in U.S. dollars, any fluctuation in the dollar index directly impacts their value.
2.When the US dollar strengthens against other currencies, commodity prices typically:
- a)Rise, because commodities are priced in dollars
- b)Face downward pressure, because commodities become more expensive for non-dollar buyers and global demand falls
- c)Remain unchanged, as the effects cancel out
- d)Become more volatile but do not trend in either direction
Show the answer
Answer: (b) Face downward pressure, because commodities become more expensive for non-dollar buyers and global demand falls
When the dollar strengthens against other currencies, commodities typically become more expensive for buyers using non-dollar currencies. This often reduces global demand and puts downward pressure on commodity prices.
And the reverse: conversely, when the dollar weakens, commodities appear cheaper in other currencies, encouraging demand and driving their prices upward. For example, a weaker dollar often supports higher demand for gold and crude oil.
The mechanism is a demand effect, not an accounting one. A buyer in Japan or Germany finds the same barrel genuinely dearer in his own currency when the dollar rises, so he buys less — and the dollar price falls in response.
Currency fluctuations also reflect broader economic conditions, such as interest rate policies, inflation, and global trade flows.
The effect is opposite for importers and exporters. Emerging markets with weaker domestic currencies face higher import costs for dollar-denominated commodities, influencing inflation and consumption patterns. But exporters of commodities may benefit when their local currency weakens, as dollars revenues lead to more home currency revenues, when converted back.
In essence, the dollar index serves as a key barometer for commodity traders and investors. Understanding its movement helps anticipate shifts in demand, pricing trends, and overall market sentiment.
Where this is taught
Free preparation for NISM Series XVRelated terms
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- Dollar denominated indexAn index built to measure returns on Indian equity in US dollar terms — NIFTY50 USD restates the NIFTY 50 by the ratio of the base-date exchange rate to the current one.