Making Sense of the DXY

This is very cool!

I was wondering why there's factor of ~50 in the ICE index formula. It turns out that factor was selected when the changeover from local currencies to euro happened. The multiplier makes the old formulation agree with the new formulation on the change date. According to Claude, the old formulation had exponents on DEM, FRF, ITL, NLG, BEF that sum up to the current euro exponent. I couldn't find a multiplier for the old formulation (I'm guessing it's selected to make the level 100 at some start date). I guessed a value around 12.5.

I did my best to make a DXY with a long history by stitching together free FRED data here: https://github.com/pandas-user/dxy/blob/main/dxy.ipynb

It's really interesting to see how much of an effect the Plaza Accord had on DXY. One thing I didn't check but might be cool is the ratio between dollar devaluation and positive stock market return during the three 1 year periods starting with the end of Breton Woods, the Plaza Accord, and the 2024 tariff thing.

How is this not a zero-sum scenario? You are putting individual currencies against their averages, so the combined return is zero, which means alpha is zero...now that makes sense, but the whole reasoning in the article does not