Hi Pradeep, the dollar index (DXY) is an index that tracks the performance of the US Dollar against 6 of its most traded counterparts. These include:

Euro (EUR)
Japanese Yen (JPY)
Great Britain Pound (GBP)
Canadian Dollar (CAD)
Swiss Franc (CHF)
Swedish Krona (SEK)

The DXY is a trade-weighted index and the above currencies have the following weights in the index:

EUR - 57%
JPY - 14%
GBP - 12%
CAD - 9%
CHF - 4%
SEK - 4%

Given how heavily weighted the Euro is in the index, movements in EUR/USD have a significant influence on the DXY.

A rising DXY means the dollar is strengthening, in general, against these currencies; while a falling DXY means the dollar is weakening. So, in short, the DXY tells you how the dollar is performing, in general.

Coming to the second part of your question, it is indeed very important to track the DXY. The dollar is the world's reserve currency as well as the most traded currency. Moreover, most of the global commodities are also priced in terms of the dollar. Hence, given its strategic importance, strengthening or weakening of the dollar impacts not only currency movements but also movements among other asset classes: commodities, equities, and bonds.

In FYERS School of Stocks, within the Intermarket Analysis and Sector Rotation module, we have explained in detail the correlation that exists between the dollar and commodities, dollar and equities, and dollar and bonds. I suggest you read this module, to gauge how asset classes correlate with the DXY.

To visit and read the module, click here

What is the Dollar Index and why is it important to track the Dollar Index?