US Dollar Index

Written by Research | 12 August 2009

The US Dollar Index; USDX or DXY; better known for its' symbol is an index or a measure that shows the value of the US dollar relative to a basket of major foreign currencies. It is a trade weighted average or a geometric means of the dollar's value as against the Euro, which is the currency being used by the unified group of European nations, the Japanese yen, the Pound -Sterling known as the GBP, Canadian Dollar, the Swedish Krona and the Swiss Franc. Each currency has an equivalent value or percentage share to the composition of the US dollar index as it is traded in the Inter-Continental Futures Exchange at the New York Board of Trade.

The US Dollar Index corresponding to the value of the dollar versus the other major foreign currencies has been steadily moving downwards from the year 2001 to 2008. This was due to the overall economy of the United States since the collapse of the housing bubble, the depreciating real estate prices plus the financial crisis and unemployment figures that weighed heavily on the fundamentals for the dollar. A  slight recovery was experienced in the succeeding year which led stocks to move higher and with the Federal Reserve acting swiftly to prevent a further deterioting economy had infused so much money to bail out Wall Street and the other major institutions. However, as time past the continuation of the dollars downward movement has not stopped and may take some time for its recovery. ICE’s Dollar Index and crude oil have a correlation of minus 0.61 in the past two months, compared with minus 0.26 since the start of the year, based on percentage moves, according to data compiled by Bloomberg News. A reading of 1 indicates the two are in lockstep, while minus 1 indicates they always go in an opposite direction. Reference to Bloomberg News dated 21 of May, 2009 The Dollar Index, used by Intercontinental Exchange Inc. to track the U.S. currency versus the euro, yen, pound, Swiss franc, Canadian dollar and Swedish krona, dropped as much as 1.5 percent to 80.91, the lowest level since Dec. 31, on reduced demand for safety.

It has been used as the main indicator by most professional traders as a guide to the direction of the US dollar and how it affects prices in the futures market. Not only in the financials but also on the commodities and precious metals markets; as well as the crude oil prices traded in the different exchanges worldwide. The US dollar index measured on spot and traded in the futures market has its trading limits like any other tradable instrument that has a heavy influence on market sentiments. It is the barometer used to find the levels and value of other currencies traded both on the spot and futures market.

If one would simply do their research and due diligence on the subject of the US Dollar index; it would not be surprising if it would show some of the intricacies and behavioral patterns that reflects the mirror image of the other foreign currencies. However, some do follow the price movements but seldom do they use it as an equivalent hedge strategy when trading the foreign exchange market. It is vital not only to follow its direction but utilizing its unique features of price range and its net change can provide a mathematical equation as to the corresponding price movement or fluctuation of the spot foreign exchange. This may be one of the best techniques developed and kept secret of the foreign exchange trading. It may also be wise to take advantage of this concept and benefit from it.