Behind the U.S. Dollar Index: Analyzing the Economic Factors

The U.S. Dollar index is a vital indicator for understanding the strength of the US in the global economy. Given that the US dollar is involved in most of all foreign exchange transactions for both trade and capital flows, it guides policy decisions across the globe. Both global asset prices and commodity prices are impacted by changes in the U.S. Dollar index. This immense pervasive influence of the U.S. Dollar Index creates interest in better understanding of factors that influence the index with the aim to enable better prediction of changes in the DXY. The current study has attempted to model the short-term and long-term impacts of various U.S.-based socio-economic factors, global commodity prices and geopolitical events on the U.S. Dollar Index using the Auto-Regressive Distributed Lag Model (ARDL). The results show that the U.S. Dollar Index is highly persistent and is also impacted by U.S. unemployment, U.S. interest rates and global commodity prices. Economies can hence be better prepared for the effects of changes in DXY on their domestic currencies by mainly keeping track of trend in the U.S. Dollar Index and U.S. economy data.