Revisiting the dollar index

This research is an inter-temporal update of an empirical paper published by Essayyad et al., which is based on work of Loretan and Nardo et al. We continue to employ the same principal component technique, to construct an alternative US Dollar Index to gauge movements in currency markets. The results show that the weights of the 12 indicators as reported by Essayyad et al. in 2009 are different from those weights as reported in 2012. The difference in the results can be attributed to the changes in the values of economic and financial variables due to 2008 economic/market collapse, natural disasters including droughts, escalating cost of wars, and the subsequent recession that prevailed in OECD member countries. The aforementioned factors and the persistent increase in national debt have affected the international value of the US dollar. Nonetheless, the results of t-statistics show that there is no significant difference at the 0.05 level between the weights based on the 2009 data and the 2012 data, which substantiate the findings in the 2009 study about the relative importance of each indicator in the dollar index.