The impact of uncertainty and risk indices on the dollar index: An empirical study

In this study, the determinants of the U.S. Dollar Index (DXY) were analyzed using the Autoregressive Distributed Lag (ARDL) model, considering various economic and financial indicators. The independent variables included the Bloomberg Commodity Index (BCOM), the Economic Policy Uncertainty Index (EPU), the Volatility Index (VIX), the U.S. 5-year Treasury bond yield, and U.S. inflation (ENF). The analysis was conducted using monthly data from January 1997 to December 2023. The findings indicate that all independent variables significantly influence the U.S. Dollar Index in the long run. The Bloomberg Commodity Index and the Economic Policy Uncertainty Index exert statistically significant negative effects on the Dollar Index. The increase in commodity prices is found to reduce the purchasing power of the dollar, leading to a depreciation in its value. This result is consistent with the international literature, which suggests that rising commodity prices tend to negatively impact the U.S. dollar. Similarly, the negative impact of the Economic Policy Uncertainty Index suggests that heightened economic and political uncertainty decreases demand for dollar-denominated assets, thereby weakening the dollar. Conversely, the Volatility Index (VIX), the U.S. 5-year Treasury bond yield, and inflation (ENF) have statistically significant positive effects on the Dollar Index in the long run. Higher financial market volatility is observed to drive investors toward the U.S. dollar as a safe-haven asset, strengthening the index. Additionally, rising Treasury bond yields attract international investors to U.S. bonds, increasing demand for the dollar and contributing to its appreciation. Inflation also positively affects the Dollar Index in the long run, as expectations of higher inflation lead to anticipations of tighter monetary policy by the Federal Reserve, thereby supporting the dollar's value. In the short-term dynamics, the error correction term (ECM) was found to be negative (-0.1212) and statistically significant at the 1% level, indicating that approximately 12% of short-term disequilibria are corrected within the following month. The short-term results also confirm that commodity price increases and economic uncertainty continue to exert negative effects on the Dollar Index, while volatility, bond yields, and inflation contribute positively. Based on these findings, it is suggested that policymakers should enhance the predictability of monetary policy, implement measures to mitigate fluctuations in commodity markets, and adopt strategies to reduce economic uncertainty. Effective management of financial market volatility and interest rate policies is also crucial in ensuring exchange rate stability. This study contributes to the understanding of how global uncertainty and macroeconomic factors influence currency markets and provides insights for policymakers and financial market participants.