The Dollar Index
What is the dollar index?
The U.S. dollar index consists of an average taken from a basket of foreign currencies versus the U.S. dollar and is often referred to as the USDX. We find this to be an invaluable tool when trying to gauge the overriding greenback strength versus the major currency counterparts. For example: if you were considering buying sterling versus the dollar but you checked the USDX and noticed that the index was moving higher; you may have then checked the EURGBP chart and seen this is offering a better opportunity to trade a strong vs weak currency. There are numerous ways the index can be utilized like this. The support and resistance level provided by the index can often give a further insight into the potential significance from a historical perspective.
The USDX should not be confused with the alternative TWDI which is utilized by the Federal Reserve. This alternative index was named the “trade-weighted U.S. dollar index” by the FED. Some brokers do however name the dollar index as the DXY. The USDX does not reflect or indicate the United States trade position in relation to the global economy. Large institutions do not trade or hedge in the USDX as it is not a currency in itself.
Dollar Index Currencies
The U.S. Dollar Index is formulated by measuring the relative strength of the dollar versus six other major foreign currencies. The list does not include all of the worlds currencies with notable omissions being Taiwan, South korea and China but gives a very well balanced overview of heavily traded currencies as follows.
- Euro (EUR) – 57.6%
- Japanese Yen (JPY) – 13.60%
- British Pound (GBP) – 11.90%
- Canada dollar (CAD) – 9.10%
- Swedish Krona (SEK) – 4.2%
- Swiss Franc (CHF) – 3.6%
For a better understanding of the constituent elements, and associated weighting, please see the USDX pie chart above. The Euro is heavily weighted as there are 16 members of the EU who adopted the common currency as their sole currency.
We place a heavy emphasis on the dollar index in our weekly and daily forex analysis. Many traders, especially new ones, will instead focus on technical indicators derived from the price action and neglect to monitor the USDX. If you fall into this category maybe you canto over your recent losing trades and see if the dollar index would have helped you in any way. For a quick reference you can check this basic dollar index chart. For a detailed look at the UDX then sign up for a Metatrader demo trading account with a broker that provides the index.