What is the purpose of the dollar index as described?

• A. It is a weighted measure of the US dollar’s value relative to a basket of currencies.
• B. It is a measure of US GDP growth.
• C. It is a measure of inflation expectations.
• D. It is a stock market index for the dollar-denominated securities.

Answer: (A)

The dollar index is a single, weighted gauge of the US dollar’s value relative to a basket of other major currencies. It combines several cross-rates into one number, weighting each currency by how much the U.S. trades with them, so movements in the euro, yen, pound, and others influence the index. When the index rises, the dollar is stronger against that basket; when it falls, the dollar is weaker. Traders use it as a quick benchmark to assess overall dollar strength, guide pricing and hedging decisions, and compare performance over time. It isn’t a measure of GDP growth, inflation expectations, or stock market performance, which are separate indicators.