U.S. Dollar Index
A practical example of a weighted index is the U.S. Dollar Index, traded on the New York Futures Exchange. In order of greatest weighting, the 10 currency components are the Deutschemark 20.8%, Japanese yen 13.6%, French franc 13.1%, British pound 11.9%, Canadian dollar 9.1%, Italian lira 9.0%, Netherlands guilder 8.3%, Belgian franc 6.4%, Swedish kroner 4.2%, and the Swiss franc 3.6%. This puts a total weight of 75.5% in European currencies with only the Japanese yen representing Asia, not a practical mix for a world economy that has become dependent on Far Eastern trade. Within Europe, however, allocations seem to be proportional to the relative size of the economies.
The Dollar Index rises when the U.S. dollar rises. Quotes are in foreign exchange notation, where there are 1.25 Swiss francs per U.S. dollar, instead of .80 dollars per franc as quoted on the Chicago Mercantile Exchange’s IMM. For example, when the Swiss franc moves from 1.25 to 1.30 per dollar, there are more Swiss francs per dollar; therefore, each Swiss franc is worth less.
In the daily calculation of the Dollar Index, each price change is represented as a percent. If, in our previous example, the Swiss franc rises .05 points, the change is 5/12 5 04; this is multiplied by its weighting factor .208 and contributes +. 00832 to the Index.