Tracking the Dollar Index to Understand Dollar–Rupee Moves 18Dec2025
(The views expressed here are for information purposes only and should not be construed as a recommendation or investment advice. While the author is a CFA Charterholder with nearly 25 years of experience in financial markets, this content is intended to share general insights and does not constitute financial guidance. Please consult your financial adviser before taking any investment decision. Safe to assume the author has a vested interest in stocks / investments discussed if any.)
Tracking the US Dollar Index is a useful starting point to understand why the rupee moves the way it does, when Indian equity investors are anxious about the rupee sliding beyond 91 to the dollar. Delays around the US–India trade deal, global uncertainty and shifting expectations on US interest rates have added to the anxiety.
But history shows that sharp rupee weakness is rarely driven by just one factor. Over the past decade, the rupee has moved in cycles shaped by global dollar strength or weakness, foreign investor flows, India's current account deficits and RBI intervention in the foreign exchange market.
Before we deal with the relationship between the movements in dollar index and dollar-rupee exchange rate, let us discuss about the dollar index first.
2. Key drivers of Dollar Index (DXY)
The US Dollar Index (DXY) is a measure of the value of the US dollar relative to a basket of six foreign currencies, namely, the Euro, Japanese Yen, British Pound, Canadian Dollar, Swedish Krona and Swiss Franc.
Key drivers:
Interest rate differentials: When the US Federal Reserve raises interest rates relative to other major central banks, US assets offer higher returns, attracting foreign capital and increasing demand for the dollar and consequently leads to strong DXY.
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On the other hand, when the US Fed cuts rates relative to other central banks, the dollar can weaken, pushing the DXY lower. Lower US interest rates may also reduce demand for US assets from both domestic and foreign investors.
This is what unfolded in the first half of 2025, when US stocks and bonds fell, prompting some to theorise that a weaker dollar (falling DXY) was weighing on asset prices, although broader macro factors were also at play.
A falling DXY doesn’t automatically push US asset prices lower; often, both the dollar and asset prices respond to broader macro factors like interest rate expectations, inflation or global risk sentiment.
In some cases, a weaker dollar can even make US assets cheaper for foreign investors, supporting demand for stocks or bonds. At the same time, domestic factors such as rising rates, earnings concerns or inflation shocks can have a bigger impact on prices than the dollar’s movements.
Economic performance: Strong US economic data such as robust GDP growth, high employment figures (Non-farm Payrolls) and healthy consumer spending boost investor confidence in the dollar compared to other major economies, resulting in a rise in DXY.
Global risk sentiment: The US dollar acts as a safe-haven asset. During periods of geopolitical instability, financial crises or market volatility, investors flock to the dollar for safety, driving the index higher regardless of US economic conditions. This was most evident during the 2008 Global Financial Crisis.
Relative strength of the Euro: Since the Euro makes up 57.6 per cent of the DXY basket, any significant economic or political shift in the Eurozone (like ECB policy changes or regional instability) has a disproportionately large inverse impact on the dollar index.
Trade balance and demand: A narrowing trade deficit or increased global demand for US exports creates a fundamental need for dollars to settle transactions, which provides structural support for the DXY.
3. What the data are really showing
The data from 2014 to 2025 show that while USD-INR responds to shifts in global dollar strength, the relationship is strong in some years and partial and muted in other years -- even negative in a few years.
A rising DXY generally pressures the Indian rupee to depreciate, pushing USD-INR exchange rate higher, while a falling DXY supports rupee appreciation. But the relationship is not linear and direct always.
The above table tracks yearly percentage changes in the US dollar-Indian rupee exchange rate and the US Dollar Index from 2014 to 2025 (partial). Together, these numbers reveal how global dollar cycles interact with the Indian rupee.
The data help separate periods driven by global dollar strength from those dominated by India-specific forces.
4. Understanding the dollar index as the global anchor
The US dollar index serves as a global anchor because it acts as a benchmark for measuring the relative strength of the world’s primary reserve currency against other major economies. The dollar index acts as the reference point for global currency movements.
By consolidating the performance of the dollar into a single number, it allows central banks and international investors to gauge global liquidity and "risk-on" or "risk-off" sentiment at a glance.
Ultimately, this index acts as a foundation for global finance, influencing the pricing of essential commodities like oil and gold while determining the borrowing costs for nations with dollar-denominated debt.
5. The rupee's distinct behaviour
High positive DXY years such as 2014, 2015, 2018, 2021, 2022 and 2024 reflect phases of broad dollar strength, typically driven by US monetary tightening or global risk aversion. Negative DXY years like 2017, 2020 and 2025 indicate phases of dollar weakness or easing financial conditions (see table above).
USD-INR exchange rate follows the direction of the dollar cycle over long periods but it can be volatile during certain periods, like, the 2013 Taper Tantrum, the 2008 Global Financial Crisis and the Indian government policy logjam in 2011.
However, as part of its managed float exchange rate system (IMF recently described it as crawl-like), Reserve Bank of India, India's central bank, actively intervenes in the forex market to smooth currency movements.
The degree of RBI's forex intervention is one elephant in the room to accurately predict the relationship between DXY and USD-INR.
Let us unpack the data presented in the above table.
(A) Positive correlation:
There is a strong correlation, between DXY and USD-INR, in 2022, 2017 and 2015. During these years, the DXY movement exhibited strong influence on USD-INR. For example, in 2015 and 2022, the DXY surged by 9.3 per cent and 8.2 per cent respectively, while the dollar appreciated (versus the rupee) by 4.9 per cent and 11.2 per cent respectively.
During 2017, the DXY declined by 9.8 percent while the dollar too fell by 6 per cent against the rupee. However, these moves have to be seen in the context of other factors; like, FPI outflows from India and any other domestic or global factors.
The year 2022 is a clear example of alignment between global and domestic forces. A strong rise in DXY coincided with a sharp depreciation of the rupee. High commodity prices, capital outflows and aggressive US rate hikes reinforced the global dollar impact on India.
In Mar2022, the US Fed began increasing interest rates due to galloping inflation in the US and India witnessed FPI outflows (equity and debt) of Rs 1.33 lakh crore.
The India FPI inflows (equity and debt) in 2015 were modest at Rs 0.64 lakh crore.
In 2017, there were strong FPI inflows (equity and debt) amounting to Rs 2.0 lakh crore.
(B) Negative correlation:
Even though USD-INR generally moves in the same direction as the Dollar Index, 2025, 2023 and 2020 break this pattern, with the rupee moving opposite to global dollar trends.
In calendar year 2025 so far, the dollar weakened globally (DXY down 9.3%), but the rupee continued to depreciate (rupee loses 5.1%), pointing to domestic factors such as capital flows, trade dynamics and policy choices overpowering the global dollar trend.
The US president Trump imposing a 50 per cent tariff on India is a challenging episode for Indian economy in general and the rupee in particular. During 2025 (till yesterday), FPI outflows (equity and debt) are Rs 0.92 lakh crore -- the outflows are weighing on the sentiment.
In 2020, the dollar weakened sharply, yet the rupee still depreciated modestly, showing negative correlation between DXY and USD-INR, despite the COVID-19 pandemic-related stress.
In the year 2020, India witnessed strong FPI inflows (equity and debt) of Rs 1.03 lakh crore, which might have dampened the pandemic-related stress for the rupee.
In 2023, the moves in dollar index and rupee are mild but opposite. India FPI inflows (equity and debt) were strong to the tune of Rs 2.37 lakh crore in 2023. In addition, India experienced strong post-Pandemic economic growth, cushioning the rupee.
(C) Positive but mild:
While DXY and USD-INR had strong correlation in years 2022, 2017 and 2015, some other years witnessed positive but moderate relationship.
Of the 12 years (2014 to 2025) on which this analysis is based, six years experienced positive but mild correlation. The years are: 2024, 2021, 2019, 2018, 2016 and 2014.
2014: DXY surges by 12.6%, but dollar gains only 2%. FPI inflows (equity and debt) to India were strong at Rs 2.56 lakh crore.
2018: The US Fed increases interest rates; DXY rises 4.1% and USD-INR goes up sharply. India FPI outflows (both equity and debt) were modest at Rs 0.81 lakh crore.
2024: DXY surges by 7.0%, but dollar gains only 2.9% versus rupee. In 2024, strong India FPI inflows (equity and debt) were strong at Rs 1.66 lakh crore.
Overall, the rupee broadly follows the global dollar cycle: it weakens when the dollar index rises sharply and tends to strengthen during the relatively rare periods when the DXY declines.
In some years, however, the relationship becomes much weaker, as domestic factors begin to dominate currency movements. RBI currency intervention, foreign investor flows and local macroeconomic conditions often dilute the direct impact of dollar on the rupee.
6. DXY, RBI intervention and capital flows
As stated above, rupee movements are shaped by a combination of global and domestic factors. Two of the most important domestic channels are RBI forex intervention and foreign portfolio investor (FPI) flows.
When the dollar strengthens globally, the RBI typically steps into the market to dampen excessive rupee depreciation by selling dollars from its foreign exchange reserves.
Conversely, during periods of dollar weakness, RBI often absorbs inflows by buying dollars, preventing sharp rupee appreciation and building reserves. This asymmetric intervention strategy explains why USD-INR rarely mirrors the magnitude of DXY moves.
FPI flows further shape short- and medium-term rupee dynamics. Equity inflows tend to support the rupee by increasing dollar supply, while equity outflows amplify depreciation pressures during global risk-off phases.
Debt flows are even more sensitive to interest rate differentials and expectations of US monetary policy. Periods of rising US yields often trigger debt outflows despite a stable or falling DXY, weakening the rupee independently of global dollar trends.
Instead of allowing sharp appreciation during weak dollar phases or sharp depreciation during strong dollar phases, the RBI-engineered rupee moves gradually. This results in a long-term bias toward mild depreciation while avoiding currency shocks (in fact, 25-year average for dollar-rupee exchange rate movement is 2.7 per cent).
7. Summary
While the dollar index doesn't include the Indian rupee, the movements in the index are often a good indicator of the broader trend in the USD-INR exchange rate. A stronger DXY typically leads to a weaker INR against the dollar, while a weaker DXY tends to lead to a stronger INR.
However, the relationship isn't always linear and neat, as local factors such as India's economic conditions, inflation, current account balance and capital flows can also influence the rupee's value independently of the dollar index.
The current dollar index is 98.4, while the USD-INR is 90.3.
For Indian investors, a weakening rupee does not automatically spell trouble, as equity returns are driven more by earnings growth and capital flows than by currency moves alone.
A depreciating rupee can even support export-oriented companies, while RBI intervention helps limit extreme volatility.
The bigger risk for investors lies in sudden global shocks that trigger capital outflows, rather than gradual, managed currency depreciation.
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References:
Forex Data Bank
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Additional data:
Relationship Between Dollar Index and Dollar-Rupee Exchange Rate:
Chart showing annual percentage change in major currency pairs, USD, Euro, JPY, RMB (Chinese Renminbi), Indian rupee and US dollar index from 2014 to 2025 >
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