11.10 The dollar: DXY composition and the dollar smile

The US Dollar Index (DXY), published by ICE, is a geometric average of six exchange rates¹:

\begin{aligned} \text{DXY} = 50.14348112 &\times \text{EURUSD}^{-0.576}\times\text{USDJPY}^{0.136} \\ &\times\text{GBPUSD}^{-0.119}\times\text{USDCAD}^{0.091} \\ &\times\text{USDSEK}^{0.042}\times\text{USDCHF}^{0.036}. \end{aligned} \tag{11.23}

The weights are EUR 57.6%, JPY 13.6%, GBP 11.9%, CAD 9.1%, SEK 4.2% and CHF 3.6%. They reflect US trade partners as of 1973, with base March 1973 = 100. Taking logs, $\partial\ln\text{DXY}/\partial\ln\text{EURUSD} = -0.576$ : a 1% euro rally lowers DXY by about 0.58%. Neither the yuan nor the rupee is in DXY. For EM questions use the Fed's broad trade-weighted index (FRED DTWEXBGS).

DXY was about 101.5 on 6 Nov 2026, up about 1.9% y/y². The Federal Reserve's nominal broad dollar index, a trade-weighted alternative with a free primary history, was 121.67 on 30 Oct 2026³.

The dollar smile is a heuristic (Stephen Jen) that the dollar rises in two states:

global risk-off, through a safe-haven and dollar-funding squeeze;
US outperformance, through higher US rates and growth.

It falls in the middle, during synchronised global growth. 2022 was both ends at once. 2026 has been mixed: the war produced a haven bid, but US inflation and Fed hikes also supported the dollar.

Why a strong dollar hurts EMs Much EM corporate and sovereign debt, and most trade invoicing, is in dollars. A stronger dollar raises the local-currency burden of dollar debt and tightens credit. It also lowers dollar-denominated commodity prices received by EM exporters, though India, a commodity importer, partly gains from this.