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What is Dollar Index and why it's important ?
Dollar Index (often referred as to DXY) is a measure of the value of the U.S. dollar relative to a basket of 6 Foreign Currencies
🔰Foreign Currency Weightages against the measure
Euro - 57%
Japanese Yen - 13.6%
Canadian Dollar - 9.1%
British Pound - 11.9%
Swedish Krona - 4.2%
Swiss Franc - 3.6%
⏳Created - 1973
Base Value - 100
Let me explain in simple words - If Dollar Index is 107, USD is expensive by 7%, which hurts emerging economies mostly an expensive USD puts pressure on their financial markets.
If Dollar Index is at 90, its cheaper by 10% than its fair value, which will again hurt the emerging economy as majority exports goes to US.
📚Historic Value
It reached an all-time high in 1984 at nearly 165, and an all-time low of around 70 in 2007. In the years since then, the U.S. dollar index has been relatively range bound, fluctuating between 90 and 110. As of tonight, its trading at 107.9, showing some signs of topping off.
The index is affected by macroeconomic factors, including inflation/deflation in the dollar and foreign currencies in the basket, as well as recessions and economic growth in those countries.
Last week when Japan raised its interest rate after decades, USD some weakness and slipped.
Dollar Index adapts to better represent those countries that the U.S. buys from and sells to most.
💡Interpreting the USDX
An index value of 120 suggests that the U.S. dollar has appreciated 20% versus the basket of currencies over a particular time period. Simply put, if the USDX goes up, that means the U.S. dollar is getting stronger in value compared to the other currencies.
Similarly, an index value of 80, indicating a fall of 20 from its initial value, implies a 20% depreciation in strength relative to the other currencies. The appreciation and depreciation results are a factor of the time period in question.
📊5 ways in which dollar index impacts us?
1⃣ Stock market
When the index falls, the rupee appreciates, and the dollar weakens. As a result, investors in the US see an opportunity for higher returns in India, which leads to an inflow of Foreign Institutional Investment (FII). Due to heavy inflows, there is heavy buying in the overall market, and the stock market turns bullish - goes up.
2⃣ Metal Price Change
If we look at historical data, we can conclude that gold prices are inversely related to the dollar index value. When the dollar index increases and the dollar strengthens, the gold price will fall. Gold gets imported into India in large quantities, and therefore it impacts the economy as a whole.
3⃣ Fuel Prices
India is the largest crude oil importer. The change in the dollar index affects crude oil prices and impacts us. When the dollar index rises, crude oil and other commodities become more expensive. It increases our import costs and widens our current account deficit. Also, it affects the profitability of the oil importers and refineries in India.
4⃣ Inflation
An increase in the dollar index makes the dollar strong and depreciates the Indian rupee's value. A weakened rupee makes imports costlier and impacts Indian company profitability due to increased production costs. Increased costs for companies mean companies have to increase the prices of goods and services, which leads to inflation. The overall Gross Domestic Product (GDP) is impacted and suffers a slowdown when the dollar strengthens.
5⃣ Companies with Dollar-Denominated Debt
Some Indian companies have borrowed Dollar-denominated debt for cost-effectiveness. These companies are directly affected when the dollar rises. A strong dollar proves costly to companies with dollar-denominated debt as they have to shell out more in rupees to repay their debt. It impacts the company's profitability and might lead to a financial crunch.
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