The US dollar and exchange rates: indexes, drivers and earnings

An exchange rate is the price of one currency in terms of another. When people say "the dollar is strong," they mean a dollar buys more foreign currency than it did before: more euros, more yen, more pesos. Because no single exchange rate tells the whole story, economists and traders follow dollar indexes that average the dollar's value against many currencies at once.

The dollar matters to stock investors even if they never trade a currency. Most large US companies sell abroad, buy inputs abroad or compete with foreign firms, so the exchange rate changes what their foreign sales are worth in dollars, how cheap their imports are and how competitive their exports look. A swing in the dollar shows up in earnings reports as a line about "currency headwinds" or "tailwinds."

This guide explains how exchange rates are quoted, how the Federal Reserve's broad dollar index differs from the better-known ICE dollar index (DXY), what tends to move currencies, and how to work out the effect of a dollar move on a company's reported earnings, with real numbers from the Fed's own data.

How exchange rates are quoted

Every currency pair has a base currency (first) and a quote currency (second). The rate tells you how many units of the quote currency one unit of the base costs. On October 23, 2026, the Federal Reserve's daily noon rate for EUR/USD was 1.1199: one euro cost $1.1199. The same day USD/JPY was 156.87: one dollar cost ¥156.87.

The direction trips people up. For EUR/USD the dollar is the quote currency, so a higher number means a weaker dollar. For USD/JPY the dollar is the base, so a higher number means a stronger dollar. To read any pair, ask which currency is first: the rate rises when the first one gains. The Currency pairs and pips: quotes, lots, pip value and leverage guide covers quoting in more detail.

Two other distinctions matter:

• Nominal versus real. A nominal rate is the market price. A real exchange rate adjusts for inflation in each country, so it measures whether goods priced in one currency have become cheaper or dearer than goods priced in the other.
• Bilateral versus effective. A bilateral rate compares two currencies. An effective (trade-weighted) rate averages many bilateral rates, weighting each by how much the country trades with the United States. A dollar index is an effective rate.

Two dollar indexes, two different baskets

The Fed's broad dollar index

The Federal Reserve Board publishes a nominal broad dollar index in its H.10 release, with January 2006 set to 100. Since a 2019 revision it covers 26 currencies (the euro area counts as one) and weights them by goods and services trade, with the weights updated annually. Daily changes are combined as a geometric weighted average of the bilateral moves.

The 2026 weights published by the Fed put the euro area first at 21.0, followed by Mexico (14.8), Canada (12.8), China (10.9), the United Kingdom (5.2) and Japan (5.2). That mix reflects who the United States actually trades with, which is why economists use this index to judge how the dollar affects US trade and inflation.

ICE's U.S. Dollar Index (DXY)

The index most traders quote is the ICE U.S. Dollar Index, ticker DXY. ICE's methodology defines it against six currencies of the top US trading partners as measured in 1973, with March 1973 as the base (100). Its weights are fixed:

DXY has no Mexican peso and no Chinese yuan, two of the largest weights in the Fed index. In practice DXY behaves largely like an inverted EUR/USD, since the euro is more than half the basket. It is the benchmark for futures and options on the dollar; the Fed index is the better gauge of the dollar's economic effect.

What moves exchange rates

Exchange rates are set by supply and demand in the largest financial market in the world (see The forex market explained: how currency trading works). Most of that demand is financial, not trade, so the drivers overlap with those of bond markets.

• Interest-rate differences. If US short-term rates rise relative to rates abroad, dollar deposits and Treasury bills pay more, and investors need dollars to buy them. Markets react to expected rate paths as much as to current ones, so central-bank guidance moves currencies (see Central banks around the world: Fed, ECB, BOJ, BoE and more).
• Growth. Faster expected growth tends to attract investment, which needs the local currency.
• Inflation. Over long periods, a currency with persistently higher inflation tends to lose value against one with lower inflation. This is the idea behind purchasing power parity. It works poorly over months and better over decades.
• Risk appetite. The dollar has tended to rise in global panics, because dollar funding and Treasury securities are in demand when investors cut risk. In March 2020 the broad index rose 8.3% from its lowest daily reading of the month (116.5) to its highest (126.1).
• Trade and capital flows. Exporters selling foreign currency for dollars, and foreigners buying US stocks or bonds, add demand for dollars. The Trade balance: how the US trade deficit is measured and read is one piece of this.
• Intervention. Governments sometimes buy or sell currencies directly to lean against a move, and some currencies are managed against a band or a basket.

Reading the dollar's history

The Fed index shows three long swings in the data since 2006:

• 2006 to 2011: decline. From 101.4 on January 2, 2006 to an all-time low for the series of 85.5 on July 26, 2011.
• 2011 to 2025: a long climb. The 2015 annual average (108.2) was 13% above 2014's (95.6), and the index ended March 2015 15.3% above its June 2014 level. A second leg ran from 110.5 on June 1, 2021 to 128.5 on September 26, 2022 (+16.2%), a period that overlapped the Fed's 2022–2023 hiking cycle (11 increases that took the top of the target range from 0.25% to 5.50%). The series peaked at 130.0 on January 13, 2025, 52% above the 2011 low.
• 2025 to 2026: partial reversal. The index was 121.3 on October 23, 2026, 6.7% below the January 2025 peak. The data show the move; they do not explain it.

The euro tells a similar story from its side. The Fed's monthly EUR/USD averaged 1.2178 in January 2021 and 0.9853 in October 2022. September and October 2022 were the first months below parity (1 euro = $1) since 2002. By September 2026 it averaged 1.1505.

How the dollar changes company earnings

A US company with foreign subsidiaries earns money in other currencies and reports in dollars. Its foreign results are translated at the exchange rates of the period. Nothing about the business has to change for its reported revenue to rise or fall.

Translation is only the first effect. A strong dollar also:

• Makes US exports dearer for foreign buyers, which can cost volume over time.
• Makes imports cheaper for US retailers and manufacturers that buy abroad, which helps their margins.
• Raises the dollar cost of dollar-denominated debt for foreign borrowers, which can tighten financial conditions abroad.

That is why the dollar affects sectors unevenly. Companies with large foreign sales, such as many technology, industrial and consumer-staples names, feel translation most. Domestic-focused companies, such as utilities and regional banks, barely notice it, and importers can benefit. The Stock market sectors and industries: GICS and sector ETFs explained guide explains the sector groups.

Hedging and constant currency

Companies reduce the swings with currency hedges, such as forward contracts that lock in a rate for future conversions. Hedges usually cover only part of the exposure and only for a limited time, so a lasting dollar move eventually reaches reported results.

Many companies also report constant-currency growth, which restates the current period at the prior period's exchange rates. Comparing reported and constant-currency growth shows how much of a quarter's change came from currencies rather than from the business.

Pitfalls when reading the dollar

• Which index? DXY and the Fed index can diverge when the peso, yuan or Canadian dollar move differently from the euro. Check which one a headline quotes.
• Which direction? "EUR/USD up" is "dollar down." Misreading the pair flips the conclusion.
• Nominal versus real. Over long spans, inflation differences matter. A currency that falls 5% a year against a country with 5% lower inflation has not become cheaper in real terms.
• Correlation is not a rule. The dollar has often risen in stock-market stress, but not every time, and the link between the dollar and US stocks changes sign over years.
• Daily rates are timestamped. The Fed's daily H.10 rates are noon New York buying rates. A "close" from another source may differ by a few hundredths of a cent.

The dollar compared with related measures

How Finabase does it

Finabase has a /forex page that lists 51 currency pairs in groups (majors, European crosses, yen crosses, Asia-Pacific and emerging-market pairs) with the last rate, the day's change and returns over one week, one, three and six months, year to date, one and two years. Each pair has its own symbol page with a chart, for example EUR/USD and USD/JPY.

Finabase does not publish a dollar-index page, and it has no DXY or Fed broad index series. The dollar-index chart on this page is ours, built from the Federal Reserve's public H.10 data. To see the dollar's broad direction in the app, compare the dollar's moves against several majors on the /forex page, keeping each pair's direction in mind. For news, the economy topic on Discover collects web articles about the economy, including currency stories.

Frequently asked questions

What does a strong dollar mean?

A strong dollar means one dollar buys more foreign currency than before. It makes foreign goods and trips cheaper for Americans, makes US exports dearer abroad and reduces the dollar value of foreign profits earned by US companies.

What is the difference between DXY and the Fed dollar index?

DXY measures the dollar against six currencies with fixed weights, 57.6% of it the euro. The Fed's broad index covers 26 currencies weighted by current US goods and services trade, so it includes the Mexican peso and Chinese yuan, which DXY omits.

Is a strong dollar good or bad for US stocks?

It depends on the company. A strong dollar reduces translated earnings for companies with large foreign sales and helps importers. The link between the dollar and the overall market has changed sign over time, so there is no fixed rule.

Why does the dollar rise when markets panic?

Investors and banks around the world need dollars to repay dollar debts and to buy Treasury securities, which many treat as the safest liquid asset. In a scramble for safety that demand jumps. In March 2020 the Fed's broad index rose 8.3% from its lowest daily reading of the month to its highest.

Summary

Exchange rates are prices of one currency in another, quoted as base/quote, and a dollar index averages many of them. The Fed's broad index weights 26 currencies by trade and is the better economic gauge; ICE's DXY is a six-currency market benchmark dominated by the euro. On the Fed index the dollar climbed 52% from 2011 to January 2025 and stood 6.7% below that peak in October 2026. Interest-rate differences, growth, inflation, risk appetite and flows move currencies, mostly through surprises, so forecasts are unreliable. For stock investors the practical effect is translation: a stronger dollar shrinks the dollar value of foreign profits, which is why companies report constant-currency growth alongside their headline numbers.