Dollar Index and impact on Indian market

Dollar index and impact on Indian market.. In this blogpost, let us delve into the details of Dollar Index and its impact on Indian stock market.

What is Dollar Index

The dollar index (DXY) is a measure that compares the value of the United States dollar (USD) against a basket of other major currencies. It tracks the USD’s performance relative to a weighted average of six significant currencies.

Background of Dollar Index

The Dollar Index, created by the U.S. Dollar Index Intercontinental Exchange (ICE), was introduced in 1973. It originally started with a base value of 100. The index was designed to measure the value of the U.S. dollar relative to a basket of major world currencies.

Initially, the Dollar Index included currencies such as the Deutsche Mark (now part of the euro), French franc, Japanese yen, British pound, Canadian dollar, and Swiss franc. Over time, the composition of the index was revised to better reflect global trade and currency importance.

In 1999, the Euro replaced several of the original European currencies in the index. This change was significant as the Euro became a dominant global currency. The index was subsequently rebalanced to consist of the Euro, Japanese yen, British pound, Canadian dollar, Swedish krona, and Swiss franc.

The components and weights of the currencies within the Dollar Index have been adjusted periodically to reflect changes in global trade patterns and currency importance. These modifications aim to ensure that the index accurately represents the USD’s value against a diversified basket of major world currencies, providing a broader view of the dollar’s performance in the global market.

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Weightages of currencies in Dollar Index [Dollar Index and impact on Indian market]

As of Jan 2022, following are weightages of currencies in Dollar Index.

Dollar Index and impact on Indian market

The movement of the dollar index can influence the Indian stock market in several ways:

Foreign Institutional Investment (FII) Flows: A stronger dollar can lead to a decrease in foreign investments in emerging markets like India. When the dollar strengthens, it becomes more expensive for foreign investors to put money into markets denominated in other currencies, potentially leading to reduced inflows into Indian stocks and assets.

Commodity Prices: As the dollar strengthens, commodities priced in dollars become more expensive for buyers using other currencies. Since India imports a significant portion of its commodities, including oil, a stronger dollar can lead to higher import costs, impacting various sectors of the economy and potentially affecting stock prices.

Export Competitiveness: A weaker dollar can make Indian exports more competitive in global markets as Indian goods become relatively cheaper for buyers using other currencies. This can benefit Indian companies that rely on exports, potentially boosting their stock prices

Global Market Sentiment: Changes in the dollar index can affect global market sentiment. Any major movement in the dollar index could trigger shifts in investor sentiment worldwide, impacting foreign investments in Indian markets.

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When the Dollar Index is above 100, it typically suggests that the U.S. dollar is stronger compared to the initial value set at 100. This indicates that, on average, the dollar has appreciated against the basket of currencies being measured.

Conversely, when the Dollar Index is below 100, it signifies that the US Dollar has depreciated against the basket of currencies being compared.

Disclaimer:

The content provided in this web post is for informational purposes only and should not be construed as financial advice. Readers are encouraged to consult with financial professionals before making any significant financial decisions.