Eli5: How do we measure whether the US dollar is rising or falling?

Submitted by SoshiLuver t3_10jgt50 in explainlikeimfive

I always assumed that the USD is used as a base to measure whether other currencies are rising or falling. I.e.: We check the exchange rate of a given currency with the USD to know whether it’s rising or falling.

But how do we know whether the USD is rising or falling? Which currency is it compared to? Perhaps my assumption was wrong and we use a different method to measure change in each currency?

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Gnonthgol t1_j5k9un3 wrote

We use what is knows as the US Dollar Index, or Dixie for short. This is a weighted average of various other currencies. Euro is the biggest other currency but it also looks at Yen, Pound, Canadian dollars, Krona and Franc.

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SoshiLuver OP t1_j5kau9e wrote

Thank you for your answer! What about other currencies? Is my assumption correct? When we say that X currency is rising/falling it is always relative to the USD? (In any parts of the world, since I do not live in the US)

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tiredstars t1_j5kqj7k wrote

In the UK media the pound is usually described against both the dollar and the euro, as those are the two biggest currencies for UK trade, and it's not uncommon for them to go in different directions.

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Gnonthgol t1_j5kbg9o wrote

Some currencies have their own index that they compare themselves against. This is usually based on the amount of trade with the other countries. But for the most part is is fine to use the dixie and dollar for the other currancies.

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Mister_Silverback t1_j5kg9kc wrote

There are quite literally markets where money is bought and traded, people literally just saying "I'll give you X of this currency for Y of that currency." But taking an average of these markets, you can determine the relative value of any currency to another at any given time.

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blipsman t1_j5kjtgt wrote

Look at it's value relative to other key currencies like the Euro, Pound, Yen. If your dollar buys fewer Euros then the dollar is weakening, if you can buy more Euros then the dollar is strengthening.

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