General Question about US Dollar index.

According to this website/pdf https://www.ice.com/publicdocs/futures_us/ICE_Dollar_Index_FAQ.pdf - the USD Index is calculated by the weighted global economic currencies in 1973. How the weights are calculated initially? They were determined based on the relative international trade importance of the included currencies at that time.

USDX = 50.14348112 × EURUSD^ (-0.576)× USDJPY ^(0.136) × GBPUSD ^(-0.119)× USDCAD^( 0.091) × USDSEK ^ (0.042) × USDCHF ^ (0.036)

As you can see China is not on the list, and the economic activity has shifted a lot since then.

The decision to not update the weights of the U.S. Dollar Index (USDX) to reflect current economic activity has both advantages and disadvantages. Copilot / chatgpt what they are:

Pros:

• Stability: Keeping the weights constant provides a stable benchmark that allows for consistent comparison over time.
• Simplicity: It avoids the complexity and potential controversy of frequently changing the methodology².
• Historical Continuity: It maintains a continuity with historical data, making long-term trend analysis more straightforward¹.

Cons:

• Relevance: The index may not accurately reflect the current economic reality if the trade importance of the currencies has changed significantly since 1973¹.
• Bias: It could introduce a bias if the weights no longer represent the current global economic structure².
• Responsiveness: The index may be less responsive to significant shifts in the global economy, such as the emergence of new economic powers³.

Overall in theory the biggest significant downside is the index may be less responsive to significant shifts in the global economy, such as the emergence of new economic powers. As these markets grow and become more integral to global trade, their currencies’ impact on the USD could be significant, yet this would not be captured in the index’s weighting. This lack of responsiveness to global economic shifts could potentially limit the USDX’s usefulness as a measure of the dollar’s true value against a basket of world currencies. This could give us false information about the strength of the dollar.