#Financial Markets
The US dollar index is a market index that allows currency traders, economists, and investors to measure and track the dollar's performance against a basket of six foreign currencies. The price of the USDX is affected by factors like the GDP of each country, the economic health of each country, and the fiscal policies of the central bank.
KEY TAKEAWAYS
• The USDX is a measure of the U. S. dollar strength against a benchmark of six major foreign currencies.
• The USDX is essential for determining the USD's buying power and the current state of the U.S. economy.
• Some of the factors that affect the value of USDX include the economic health of the countries in the basket, the rates of interest in the US, market psychology, and supply-and-demand relations.
The world of trading can seem complex. There are many different terms to know as a trader. You might have encountered this term in the news, in random conversations at work, or while overhearing a conversation with some wall street pros, etc. Below, we will define the dollar index, why is US dollar index rising, how to trade US dollar index, and much more.
Also known as the ICE USDX or ICE U.S. Dollar Index, the U.S. dollar index is a market index that allows currency traders, economists, and investors to measure and track the dollar's performance against a basket of six foreign currencies. These currencies represent the major countries with which the U.S. trades in partnership.
This index, established in 1973 after the dissolution of the Bretton Woods Agreement that same year, consists of six geometric weighted baskets of foreign currencies against the dollar. It was established with a base of 100.
In simple terms, the U.S. dollar index helps traders and investors understand the dollar's value (the world's most traded currency) in global markets.
The U.S. Dollar Index Currency Basket consists of six foreign currencies. These currencies include:
• Euro
• Swiss Franc
• Japanese Yen
• Canadian Dollar
• British Pound
• Swedish Krona
If the index shows positive signals by rising value, the dollar is stronger against the other six currencies in the basket. If the index falls, the dollar loses its power against the other six foreign currencies.
The U.S. central bank first created the US Dollar Index in 1973. After the Bretton Woods Agreement launched a new monetary system in 1944, where the value of the US dollar was pegged to old, the US dollar quickly rose to become the world's most valuable currency. Countries under this agreement were urged to keep a fixed exchange rate between their currency and the US dollar.
The Bretton Woods Agreement, negotiated in July 1944, came under the agreement that gold was the basis for the U.S. dollar. AOther currencies were alsopegged to the U.S. dollar’s value. However, this agreement ended in the early 1970s when President Richard Nixon announced that the U.S. would no longer exchange gold for the dollar.
However, after stagflation took over the US in 1972, President Nixon unpegged the dollar's value from gold, ending the Bretton Woods agreement. The following year, the USDX was created to serve as a benchmark against the currencies of other nations with which the US trades.
Although the initial index weight was set at 100.00, the weighting of these currencies included in the index has been changed over time to reflect changes in global trade patterns and economic importance.
The U.S. dollar index has risen and fallen at different times throughout history. In 1984, it reached an all-time high of 165; in 2007, it had an all-time low of 70. The USDX maintains the contents of the basket of currencies it had in 1973. It had only been changed once since the index when the Euro replaced the German Deutschemark. Today, the Intercontinental Exchange Group privately owns the U.S. Dollar Index, also known as ICE.
This company is popularly known as a global exchange and technology company. It operates in various markets and allows traders to trade across nine different asset classes. In 1985, futures trading was included in the U.S. Dollar Index, and ICE now maintains the responsibility of compiling and weighing six components of the Index.
Below we will explain what three different acronyms mean so you can now the difference between each of them.
The acronym USDX is the universal term for the U.S. Dollar Index. USDX is a relative measure of the U.S. dollar's (USD) strength against a basket of six influential currencies.
The Intercontinental Exchange uses the symbol DX for the futures contract for the US dollar index, followed by the month and year code. However, different data providers can use other symbols.
The DXY symbol is another famous symbol used for the US dollar index.
The USDX is an index that provides essential benefits for traders and investors. The index helps traders and investors track the dollar's performance to a basket of foreign currencies. Traders and investors can view the purchasing power of the U.S. dollar about the six currencies included in the index’s basket.
Traders use the index to determine the right time to buy or sell currencies based on what's happening with other world markets. The USDX can help tell the overall health of the U.S. economy. If the USDX falls, the US economy loses its strength, and vice versa.
Investors and traders use the index to determine the U.S. economic performance regarding imports and exports. This means that the more goods the U.S. exports, the more international demand for U.S. dollars to purchase those goods. It is important to note that when the demand for the dollar is high, the USDX rises.
The price of the USDX is affected by factors like the GDP of each country, the economic health of each country, and the monetary and fiscal policies of each central bank. However, the most critical factor is the supply and demand for the US Dollar and the currencies included in the basket. Additional factors that affect the price of the USD index are:
Rising interest rates in the U.S. make the dollar more attractive to investors and traders, increasing the value of the U.S. dollar index. However, when interest rates decline, the USDX also follows suit.
Market sentiment also affects the dollar index. In times of market crisis, the USDX tends to appreciate. The index rises during periods of economic uncertainty as traders and investors regard the US dollar as a value store amid global economic crises.
It is worth noting that the USDX futures or options contract is currently traded on the New York Board of Trade.
Traders can trade the USDX as a futures contract for 21 hours daily via various exchanges. The USDX futures contract gets its liquidity directly from the spot currency market, which is shown to have a daily turnover of $2 trillion.
The ICE USDX futures contract is the only publicly regulated U.S. Dollar Index trading market. The index is also indirectly available to trade as exchange-traded funds, mutual funds, or contracts for difference (CFDs).
Calculating the USDX can seem complex for traders and investors unfamiliar with it.
However, a simple calculation of the index involves factoring in the exchange rates of six foreign currencies and multiplying each exchange rate of the foreign currency by its weighting number.
It is important to know that the Euro is the most significant component of the index basket of currencies, making up 57.6% of the basket. This is because it represents other European countries that use the Euro as their official currency and also recognises the European Union as a key trading partner of the US.
Other currencies’ weights are:
• USD/JPY - 13.6%
• GBP/USD - 11.9%
• USD/CAD - 9.1%
• USD/SEK - 4.2%
• USD/CHF - 3.6%
The Index is calculated every 15 seconds in real time and immediately redistributed to all data vendors that monitor the USDX.
NOTE: While calculating the index, traders should know that its base is 100. If the index value goes above 100 to 150 or so, it shows that the U.S. dollar has appreciated by 50% against the basket of currencies over the given period it was measured. This also means the U.S. dollar is gaining strength compared to the other currencies in the basket.
In the same case, if the index falls from 100 to 70, it has depreciated by 30%, and the dollar has lost its strength compared to the other currencies in the basket.
For each U.S. election from 1988 to 2016, the U.S. dollar index’s percentage change since election day was calculated. Changes were tracked oovera year or 250 trading days.
Did you know? Contrary to popular belief, there was no clear trend in U.S. dollar performance after the U.S. elections.
Here’s another look at the data, this time showing the range in changes over the year and the percentage change at the end of the period:
Image: USD fluctuations after elections
Understanding how the USDX works and its importance helps traders know when to place trades or hold. As an investor or trader, you should know that the USDX has been criticised as an obsolete tool for measuring the US economy. This is because adjustments to the basket of foreign currencies rarely occur. The last adjustment to the basket was made in 1999 when the Euro replaced the Deutsche mark.
According to critics of the USDX, major U.S. trading partners are missing from the index. The U.S. has entered a significant trading relationship with more countries, including South Korea, Brazil, and China, and they should be represented in the index basket of currencies, thereby keeping the basket of currencies up to date. To start trading Forex today, sign up on BitDelta. BitDelta is an innovative multi-asset exchange that allows traders and investors to trade and invest in various asset classes, from crypto to stocks to forex and commodities.
When the DXY rises it means that the US dollar is stronger than the basket of six major foreign currencies that make up the index.
Yes, there are ways on how to invest in the U. S. Dollar Index and these are through futures contracts, ETFs, mutual funds, and CFDs.
The US Dollar Index (USDX) is a weighted average of the USD value against six major world currencies. An increase in the value of the index means stronger dollar while a decrease implies weaker dollar.
Yes, the DXY can impact the gold prices. Generally, gold prices are negatively correlated with the dollar index (DXY); thus, a higher DXY (strong dollar) causes lower gold prices.
The US dollar index uses the symbol USDX or DXY, which is simply and popularly known as the dollar index.
The dollar index impacts the forex by determining the worth of the dollar as compared to other currencies. A higher USDX can strengthen the dollar pairs while a lower USDX can weaken them.
To invest in the US Dollar Index one can trade futures contracts through the ICE exchange, or buy ETFs, mutual funds or CFD that are associated to the index.
This article is for informational purposes only and not intended as investment or financial advice. It contains opinions and speculations that are subject to change without notice.
The author and publisher disclaim any liability for decisions made based on the content of this article. Readers are advised to conduct their own research and consult a financial advisor before making investment decisions.
Join the community to receive exclusive market analysis and updates!
Ignite your financial journey with BitDelta's diverse asset classes.
