Dollar Index: Definition, Components, and Effects on Saudi Markets

The Dollar Index (U.S. Dollar Index – DXY) is a measure that reflects the strength of the US dollar against a balanced basket of major currencies worldwide. The index was developed in 1973 in response to the end of the Bretton Woods system and the transition of currencies to a flexible exchange rate system. The index calculates a weighted average of the dollar's movement against six currencies: the euro, Japanese yen, British pound, Canadian dollar, Swiss franc, and Swedish krona. Each of these currencies represents a certain percentage of the index, with the euro accounting for more than half of the total weight. These weights play a role in determining how responsive the index is to any movement in the exchange rate of one of these currencies against the dollar.

The importance of the index is global, as it is used by investors and monetary policymakers to assess the dollar's status in international markets. Many futures contracts and global financial instruments are based on its value, making it a direct influencer of commodity prices, stocks, and precious metals.

The US Dollar Index emerged in 1973, after the United States abandoned the Bretton Woods system, which linked the dollar to gold and set fixed exchange rates for currencies. With the shift to flexible exchange rates, policymakers recognized the need for an index to periodically and objectively measure the dollar's strength. Initially, the basket of currencies included a mix of European and Asian currencies, but with the launch of the euro in 1999, the basket was adjusted to replace several previous European currencies (such as the German mark and French franc).

Over the decades, the index has experienced wide fluctuations in response to global economic events, from debt crises to rising interest rates in the United States. The index reached historically high levels in late 2022 (around 120 points), influenced by the tightening of US monetary policy. These fluctuations reflect the dollar's sensitivity to major economic events and changes in international monetary and trade policies.

The Dollar Index relies on a basket of six major currencies, chosen based on the volume of trade between the United States and these economic entities. The approximate weights for each currency within the index are as follows:
- Euro (EUR): 57.6%
- Japanese Yen (JPY): 13.6%
- British Pound (GBP): 11.9%
- Canadian Dollar (CAD): 9.1%
- Swedish Krona (SEK): 4.2%
- Swiss Franc (CHF): 3.6%

These weights mean that any change in the exchange rate of the euro against the dollar has the largest impact on the index, followed by the Japanese yen and the British pound. The index is calculated through a mathematical equation that combines the exchange rates of the dollar against each of these currencies, multiplied by the specified weights.

The Dollar Index is calculated using a mathematical equation based on the exchange rates of the dollar against the six currencies that make up the index basket. Each percentage change in the exchange rate is multiplied by the currency's weight within the index, and the results are summed to provide the final reading. The index changes instantaneously with movements in exchange rates in global markets. It serves as a reference tool for measuring the relative purchasing power of the dollar, and is used by fund managers, financial analysts, and central banks worldwide as a benchmark for dollar trends.

It is worth noting that the index is traded on the ICE US Exchange through futures contracts and exchange-traded funds (ETFs), allowing traders and investors to anticipate future dollar trends through specialized financial derivatives.

During 2024 and 2025, the Dollar Index experienced notable fluctuations. After reaching historically high levels near 120 points at the end of 2022, the index began to gradually decline throughout 2023. In 2024, the index stabilized at levels higher than the beginning of the last decade, ranging between 100 and 105 points at certain times, with temporary declines to around 96-98 points by the end of the fourth quarter of 2024. By mid-August 2025, the index recorded approximately 97.97 points, a relatively high level compared to previous years but lower than the peak of 2022.

These movements reflect the impact of the US Federal Reserve's decisions regarding interest rates, as well as US and global economic data and major financial market changes. The index's stability at relatively high levels during 2024 and 2025 indicates the strength of the dollar despite some downward corrections, which is reflected across all global markets.

The Saudi economy is closely linked to the Dollar Index due to the policy of pegging the Saudi Riyal to the US dollar at a fixed exchange rate (approximately 3.75 riyals to the dollar). This peg means that any change in the global value of the dollar directly reflects on the local economy, affecting import prices, inflation, and the balance of payments.

When the dollar strengthens (the Dollar Index rises), the cost of importing goods and services priced in dollars increases, which may heighten inflationary pressures. Additionally, Saudi oil exports, which are priced in dollars, are also affected: a stronger dollar may lead to a decline in global oil prices, impacting revenues for major companies like Aramco. Conversely, a weaker dollar may improve export revenues and reduce import costs, but it could lead to lower investment flows for the riyal pegged to the dollar.

As the dollar is the primary currency for global oil and commodity pricing, the Dollar Index impacts several vital sectors in Saudi Arabia:

1. Energy and Oil Sector: The relationship is typically inverse; a rising dollar often leads to falling oil prices, which may reduce revenues for Saudi oil-exporting companies.
2. Financial Sector and Banks: Local monetary policy decisions depend on dollar movements, and the value of foreign assets and private sector loans are affected by dollar fluctuations.
3. Commodities and Consumer Sector: A strong dollar makes imported goods more expensive, putting pressure on consumer purchasing power.
4. Real Estate and Credit Sector: The impact here is indirect and manifests more through imported inflation or changes in global interest rates.

It is clear that the Dollar Index affects not just one sector, but reflects on most economic activities in the Kingdom.

There is no product or stock listed on the Saudi stock market that directly represents the Dollar Index, as it is a global tool traded in US markets, particularly through futures contracts and exchange-traded funds. In the Saudi market, dealings with the dollar are limited to the currency and cash markets, in addition to currency futures contracts (dollar/riyal) launched in derivatives trading since October 2023.

Saudi investors can benefit from dollar movements indirectly by investing in sectors affected by the dollar (such as oil or banks), or by trading currency futures contracts. Additionally, commodities like gold and oil, which have an inverse relationship with the Dollar Index, provide opportunities for hedging or investment diversification.

Although the Dollar Index (DXY) is the most recognized globally, there are other indices that measure the dollar's value against more or fewer currencies. Some of these alternatives include:

- Trade-Weighted U.S. Dollar Index: Measures the dollar against more than 20 currencies, reflecting the relative importance of each currency based on US trade volume.
- Other Currency Indices: Such as the Euro Index (EURX) or Asian currency indices, which provide a regional perspective on the dollar's strength.
- Derivatives and Commodities: For investors, futures contracts for oil or gold can serve as tools that implicitly reflect the relative value of the dollar.

In the Saudi market, there is no direct competitor index to DXY, but the development of the local derivatives market provides partial alternatives for hedging against dollar fluctuations.

The Dollar Index is influenced by several key factors, the most prominent of which are:

1. U.S. Federal Reserve Policy: Raising or lowering interest rates directly affects the dollar's attractiveness to global investors, and thus the value of the index.
2. Inflation Rates in the United States: Rising inflation may prompt the Federal Reserve to tighten monetary policy, strengthening the dollar and vice versa.
3. U.S. and Global Economic Growth: Improvement in the U.S. economy supports the dollar, while slowing growth or economic crises may weaken it.
4. Geopolitical Events: Global crises, wars, and trade tensions affect the dollar as a safe-haven currency.

All these factors make the Dollar Index sensitive to global changes, and its movements quickly reflect on Saudi and Arab financial markets.

Historical studies show an inverse relationship between the Dollar Index and global oil prices. When the dollar rises (the index increases), oil prices in other currencies become higher, which may reduce global demand and push prices down. Conversely, when the dollar weakens, oil becomes cheaper for foreign buyers, boosting demand and driving prices up.

This relationship is particularly important for the Saudi economy, which heavily relies on dollar-denominated oil revenues. Any change in the dollar's value affects the Kingdom's oil revenues and the profitability of major companies. Therefore, relevant authorities in Saudi Arabia closely monitor the index's movements and developments in U.S. monetary policy.

With the launch of the derivatives market in Saudi Arabia, investors have gained new tools to hedge against dollar fluctuations. Among the most prominent of these tools are:

- Dollar/Riyal Futures Contracts: Allow investors to lock in future exchange rates between the dollar and the riyal, helping to manage currency volatility risks.
- Investment Funds in Gold and Oil: Represent a traditional haven during dollar rises or weakness of other currencies.

These tools do not replace the index itself, but they provide practical solutions for dealing with currency risks in the Saudi investment environment.

Since the Saudi riyal is pegged to the dollar, changes in the Dollar Index indirectly affect the inflation level in the Kingdom, especially concerning imported goods. A rising Dollar Index makes importing goods and services from abroad more expensive, which may lead to internal inflationary pressures. Conversely, a weaker dollar may help reduce import costs and ease inflation rates.

As most basic commodities (such as food products, cars, electronics) are priced in dollars in global markets, any change in the dollar's value directly reflects on the Kingdom's import bill and on retail prices for the end consumer.

Data and analyses of the Dollar Index are available from several reliable global sources, such as the ICE US Exchange, Bloomberg, Reuters, and Statista, which provides updated historical data for the index. Additionally, some specialized financial applications offer real-time data on dollar movements and exchange rates.

Locally, the Saudi financial market or the central bank (SAMA) does not directly publish data on the Dollar Index, but their periodic reports include analyses of the dollar's impact on the local economy. Investors can monitor developments of the index through Saudi derivatives trading platforms or via local and global economic analysis websites.