The world of trading can seem quite complex, right, with many different terms to know as a trader.
Not to worry, in this article, we will be explaining a not-so-complex term called “The US Dollar Index”, sometimes called “The USDX.”
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.
Here is a quick explanation of everything you need about the US Dollar Index.
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 are the:
These currencies represent the major countries the U.S. is in trading partnership with.
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 know the value of the dollar (which is the world’s most traded currency) in global markets.
Apparently, with the USDX, If the index shows positive signals by rising in value, the dollar is growing in strength against the other six currencies in the basket. Also, if the index falls, the dollar loses its power against other foreign currencies in the basket.
Today, the U.S. Dollar Index is privately owned by the Intercontinental Exchange Group, also known as ICE. This company is popularly known as a global exchange and technology company, which operates in various markets and allows traders to trade across nine different asset classes.
In 1985, upon the inclusion of futures trading in the U.S. Dollar Index, ICE now maintains the responsibility of compiling and weighing the six components of the U.S. Dollar Index.
The US Dollar Index was first created by the U.S. central bank in 1973. After the Bretton Wood Agreement launched a new monetary system in 1944, where the value of the U.S. dollar was pegged gold, the U.S. 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 U.S. Dollar.
The Bretton Woods Agreement, negotiated in July 1944, came under the agreement that gold was the basis for the U.S. dollar. Additionally, other currencies were to be pegged 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 value of the dollar from gold, which resulted in the Bretton Woods agreement coming to an end.
The following year, the USDX was created to serve as a benchmark against other nations’ currencies that the US is in a trading relationship with.
Although the initial index weight was set at 100.00 over time, the weighting of these currencies included in the index has been changed to reflect changes in global trade patterns and economic importance.
Did you know? The U.S. dollar index has risen and fallen at different times throughout history. In 1984, it reached an all-time high of 165, and in 2007, it had an all-time low of 70.
The USDX maintains its 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.
1. What is USDX?
The acronym USDX is the universal term for the U.S. Dollar Index.
2. What is DX?
The Intercontinental Exchange uses the symbol DX for the futures contract for the US dollar index. The symbol DX is followed by the month and year code. However, different data providers can use other symbols for this.
3. What is DXY?
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 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:
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 the ICE exchange. 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 market for U.S. Dollar Index trading.
The index is also indirectly available to trade as exchange-traded funds, mutual funds, or contracts for difference (CFDs).
Calculating the USDX can seem a bit complex for traders and investors who are not familiar 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:
The Index is calculated every 15 seconds in real-time, which is immediately redistributed to all data vendors that monitor the USDX.
NOTE: While calculating the index, traders should know that the base of the Index is 100, and 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 a 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 over the course of a year, or 250 trading days.
Did you know? Contrary to popular beliefs, there was no clear trend in U.S. dollar performance after U.S. elections.
Here’s another look at the data, this time showing the range in changes over the year and percentage change at the end of the period:
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 to measure the US economy.
This is because adjustments to the basket of foreign currencies rarely take place. 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 making the basket of currencies up to date.
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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.