Fed's Broad Dollar Index vs. DXY
The U.S. dollar remains a central benchmark in global currency markets, and its value compared to other currencies can be assessed using both individual exchange rates and indexes like the Fed’s Broad Dollar Index and DXY.
How much the U.S. dollar can decline depends on which index you use to measure its value. The Fed’s Broad Dollar Index and the DXY can move in opposite directions, though this is relatively uncommon and typically occurs when the currencies included in each index perform differently against the U.S. dollar.
The major indexes used to measure the value of the U.S. dollar are:
U.S. Dollar Index (DXY):
The DXY measures the dollar’s value against a basket of six major currencies: the euro, Japanese yen, British pound, Canadian dollar, Swedish krona, and Swiss franc. The euro is the largest component, making up more than half the index. DXY is widely used in financial markets as a benchmark for the dollar’s strength against major developed currencies.
Federal Reserve’s Trade-Weighted Dollar Index (Broad Dollar Index):
Also known as the broad index, this measure includes 26 currencies from both advanced and emerging economies, weighted according to their importance in U.S. trade. The weights are updated annually, making this index more representative of the dollar’s value relative to all major U.S. trading partners.
Both indexes are widely referenced:
DXY is more market-focused and euro-heavy.
The Fed’s Broad Dollar Index offers a broader, trade-weighted view of the dollar’s international value.
Both indexes measure the value of the U.S. dollar, but the Fed’s index offers a broader and more accurate picture of the dollar’s global purchasing power and trade competitiveness.
The Fed’s Broad Dollar Index is currently about 14–15% above its long-term historical average, indicating the U.S. dollar remains significantly stronger than its typical level since 1997.
Z-score of the distribution is around 6.3 with current value 123.4, mean 107.5 and standard deviation 2.5.
Which means that it is about 6.3 standard deviations above its long-term mean in nominal terms. This is an extremely rare and elevated level by historical standards.
In real terms the standard deviation is around 2.
Despite the recent pullback, the DXY index shows the U.S. dollar is still overvalued relative to its historical and fundamental fair value benchmarks.
Key Differences
Breadth: DXY is more limited, covering only 6 developed market currencies, with the euro making up over half the index. The Fed’s Broad Dollar Index is more comprehensive, including 26 currencies, and better reflects the full spectrum of U.S. trade relationships.
Weighting and Updating: DXY weights are fixed and rarely updated, based on old trade data. The Fed’s index uses trade weights that are updated annually to reflect current trade patterns.
Use Cases:
DXY is widely used in financial markets as a quick benchmark for the dollar’s strength against major developed currencies. The Fed’s index is preferred for economic analysis and policymaking, as it more accurately represents the dollar’s value in global trade.
Both indexes measure the value of the U.S. dollar, but the Fed’s index offers a broader and more up-to-date picture of the dollar’s global purchasing power and trade competitiveness.
The Fed’s Broad Dollar Index is a better measure of the dollar’s value than the DXY because it more accurately reflects the U.S. dollar’s role in global trade and its value against a representative set of trading partners.
Key Differences Between AFE and EME Dollar Indexes
Composition: The Fed’s Broad Dollar Index (also called the trade-weighted U.S. dollar index) consists of a basket of currencies from the United States’ most significant trading partners, both advanced and emerging economies.
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