As we noted in a previous blog post, answering the question of what the U.S. dollar is worth can be a particularly tricky exercise. Through our research we came to the conclusion that comparing the value of the dollar against the currencies of America’s largest trading partners plus the most frequently traded currencies in the global foreign exchange (FX) markets provided a dynamic and intuitive approach to addressing this question. As we start 2014, we thought it appropriate to discuss the changes that occurred in the Bloomberg Dollar Spot Index (BBDXY) during its most recent year-end rebalance.

• For 2014, BBDXY adds the Brazilian real, removes the Singapore dollar and sees the euro and Japanese yen swap a portion of their respective market share.

• The distinction between the Bloomberg Dollar Spot Index and the ICE U.S. Dollar Index (DXY) grows as the global economy evolves, with weights to the Americas and Asia increasing in BBDXY versus the euro-dominated DXY.

• The currencies in BBDXY comprise 81% of overall trade with the U.S. and 93.7% of the daily FX volume, compared to 42% and 79.7%, respectively, for DXY1.

Looking back at our previous blog post on global FX trading, the relative trading growth of the euro (15%) has lagged the overall growth in foreign exchange volume (35%)2. However, trading in the yen has increased dramatically, growing 60% over the same period, as investors showed renewed interest in the Japanese economy. The euro remains the prominent currency in the basket, but its influence has declined from 34.3% to 31.3% for the coming year.

Additionally, the Brazilian real will enter the index with a weight of 2.15%. The inclusion of the Brazilian real—a higher-carry currency—will likely increase the negative drag of interest rate differentials in the total return index (20 basis points) and provide an increase in index volatility3.

The Brazilian real joins the Mexican peso and the Canadian dollar as an additional currency from the Americas in the basket. As shown in the table below, the regional composition of the basket has shifted slightly, with an increase in weight to currencies from the Americas and Asia and a small decrease in European currencies.

• The real was bolstered by relative growth in trade and an increased share in foreign exchange transaction volume.

• The Singapore dollar slipped to 11th place in the most recent trade volume survey. Its 13th place in foreign exchange volume fails to rank it in the top 10 of either trade partners or foreign exchange transaction volume.

Bloomberg Dollar Spot Index Weights for 2014

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