Most investors don’t have direct exposure to the currency mix that makes up the Dollar Index (DXY), but that doesn’t mean it’s irrelevant. Far from it. DXY offers a useful lens through which to view the broader forces shaping the dollar’s direction. And because it’s an index, it tends to trend more clearly than the individual currencies it comprises.
So far in 2025, the Dollar Index has been on a rollercoaster. It is having its worst year in more than 20 years. The Dollar Index fell roughly 12.5% in the first three quarters of the year, dropping from around 110 in mid-January to a low near 96.35 by July 1. It made a marginal new low on September 17, coinciding with the Fed’s rate cut, but since then, it’s mostly traded in a range up to about 100. The bounce may have ended.
Interest rates remain an important driver. The 60-day correlation between changes in DXY and the two-year Treasury yield is currently around 0.55. That’s decent, but not overwhelming. It hasn’t been much above 0.60 since early 2023, and there have been periods of notable divergence. In late March, for example, the rolling correlation slipped below 0.10—the weakest since mid-2022. That kind of breakdown suggests the dollar isn’t always dancing to the Fed’s tune.
Long-term rates tell a similar story. The 60-day correlation between DXY and the 10-year yield is also hovering near 0.55. The high for the year—just above 0.60—came about a week before the September FOMC meeting. But in May, the correlation briefly inverted, the first time since the March–May 2022 stretch. Before that, the relationship was inverse throughout 2020 and the first quarter of 2021, during the pandemic’s peak dislocations.
Gold offers another angle. With talk of dollar debasement bubbling up in the media, it’s worth noting that the 60-day rolling correlation between gold and DXY is about -0.45. That inverse relationship has held since mid-May 2022, with only a brief exception in early February. But this year, the correlation has been more volatile than in the past two years, swinging from -0.72 to just above zero. It’s now sitting a little below -0.44, suggesting gold is still moving in opposition to the dollar, but not in lockstep.
Valuation models add another layer. If we take the DXY’s component weights and adjust them using the OECD’s purchasing power parity (PPP) model, the index appears overvalued by about 43%. That’s a hefty premium. A more grounded approach might be to look at long-term averages. The 10-year moving average is around 98.50, while the 20-year average is closer to 90.35. That puts today’s levels in a historically elevated zone.
Zooming out, the bigger picture may be the unwinding of the dollar’s super-cycle. These are multi-year swings in the foreign exchange market, and the DXY has already come a long way. It hit a record low near 70.70 during the Great Financial Crisis, then peaked in September 2022 just shy of 114.80. Since then, it’s retraced to the 38.2% Fibonacci level around 98.00. The 50% retracement sits at 92.75, and the 61.8% level is near 87.50.
In my view, the 50% retracement is too close—only about 6% away—given the scale of Fed easing expected over the next 14 months. The 61.8% retracement, roughly 11.5% below current levels, seems a more reasonable target. DXY hasn’t traded below 88.00 in a decade. It held above 88.25 in February 2018 and found support near 89.20 in early 2021.
The takeaway? The dollar may be entering a new phase. The bounce off the lows may have already run its course, and the broader downtrend may be resuming. With monetary policy shifting, correlations wobbling, and valuation metrics flashing red, the Dollar Index is worth watching—not for its composition, but for what it tells us about the broad trends.
Reviewed by Marc Chandler
on
October 16, 2025
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