What is dollar index?

What it means

Because gold is priced in dollars, a stronger dollar mechanically makes gold more expensive in other currencies and tends to reduce demand. The inverse correlation is one of the more stable relationships in macro trading, though it is a tendency rather than a rule and breaks down regularly.

Why it matters

The most useful application is a sanity check rather than a signal. A gold rally accompanied by a falling dollar is coherent; a gold rally with the dollar also rising is being driven by something else — usually risk aversion — and behaves differently.

What this changes in practice

It is also a correlation risk worth naming. A long gold position and a short dollar position are substantially the same trade, and running both while believing you are diversified is a common way real exposure ends up double what was intended.