What is the US Dollar Index? Table of Contents

What is the US dollar index?

The US dollar index, also known as Dixie, is the most popular currency index in the world.

On the stock exchange, it is tradable with the USDX or DXY ticker.

The index measures the relative value of the US dollar against a basket of foreign currencies.

The US dollar index was born in March 1973 when the major countries in the world came together, agreeing to freely swing their currencies among themselves in the so-called flexible exchange rate system.

This occurred shortly after the Bretton Woods accords ended.

In particular, the US dollar index aimed to provide a geometric weighted average of the value of the dollar against a basket of currencies.

The index was initially traded at a value of 100.00, called the base value.

Therefore, when the value of the index is 80, it means that the dollar has lost 20% of its value, while if it is 120, it means that the value of the dollar has appreciated by 20%.

Historically, looking at the US dollar index chart it emerges that it reached a high of 148.1244 in February 1985 and a low of 70.698 on March 16, 2008.

Who trades on the US dollar Index?

The US dollar is still considered the world’s leading reserve currency today.

This makes the USDX an important tool for predicting movements in the financial markets.

Most commodity prices, such as gold, are quoted in USD, so when the value of USDX rises, commodity prices tend to fall and vice versa.

Bond traders also look to the USDX, since bond yields tend to decline as the value of the dollar rises, especially during times of recession.

But it is mainly the currency markets that are actively watching the USDX.

Almost all major pairs have the USD in them.

Determining the direction of the USD is essential in determining the direction of the entire market.

For example, a EURUSD trader will buy the pair in the event of a decline in the USDX (ie in the event of a decline in the value of the dollar) and sell it when the index rises.

Commodities, Forex, and stock traders tend to monitor the US dollar index before making their own decisions.

Composition and Calculation of the USD index

The value of the USDX is determined on the basis of a basket of major global currencies.

The calculation model changed only once, in 1999, when the euro (EUR) replaced several European currencies.

The European currencies included in the USDX, with their weightings, are the following:

Currencies and relative USDX Weigting in the Index
Euro (EUR) 58.6
Japanese yen (JPY) 12.6
British Pound (GBP) 11.9
Canadian dollar (CAD) 9.1
Swedish krona (SEK) 4.2
Swiss Franc (CHF) 3.6

Based on the relative weightings reported above, the USDX is calculated using the following formula:

USDX = 50.14348112 × EUR / USD ^ (-0.586) × USD / JPY ^ (0.126) × GBP / USD ^ (-0.119) × USD / CAD ^ (0.091) × USD / SEK ^ (0.042) × USD / CHF ^ (0.036)

How to trade on the US Dollar Index?

USDX is available in options trading and futures markets, where contracts with different maturities are offered.

The index is also available as an ETF on the ICE stock exchange.

Due to the importance of the US dollar on financial markets, investors use the US dollar index as a natural hedge for open positions on the currency markets.

As noted above, the US dollar is the world’s leading reserve currency.

The dominance of the US dollar on the international stage is therefore clear and this makes the USDX price relatively stable and not subject to significant external shocks.

Changes in exchange rates, however, can lead to changes in the prices of goods exported and imported from different countries.

For example, if the USD strengthens against the Japanese yen (JPY), more yen will be needed to buy US goods of equal value in USD exported to Japan, with a higher cost for foreigners.

The movements of the DXY have a strong impact on the international trade balance and provide many trading opportunities for investors around the world.

What’s the best strategy to trade US Dollar Index?

The US dollar index values ​​the US dollar and is made up of a basket of rival currencies belonging to the main trading partners of the United States.

The index level provides a fair picture of the value of the US dollar globally and an indicator of the price of commodities and other assets valued in US dollars.

Of the six rival currencies included in the index, the greatest weighting is by far that exercised by the euro, which constitutes over 50% of the weight of the index.

The other largest weight weights are the Japanese yen, the British pound, the Canadian dollar, the Swedish krona, and the Swiss franc.

Trading on the US dollar index is a great way to speculate on the value of the US dollar.

Since the index uses several currencies of major US trading partners, movements in the US dollar index tend to be more fluid than those of individual currencies.

This can make some trading strategies, such as intersections with the moving average, easier to implement when trading on the index rather than on individual currency pairs.

The drawback of trading the US Dollar Index is that traders will need to consider the implications of political and economic factors in all six countries whose currencies are included in the index.

Of course, there are many successful strategies that can be implemented when trading on the US dollar index.

In the end, the best strategy is the one that best suits the individual trader.

The mindset, the psychology of each, and the type of trader will all have an impact on the best strategy to choose.

Trend trading is one of the best ways to trade on the US dollar index because the US dollar has a tendency to form very strong and lasting trends.

These trends make breakout trading very effective, although breakout signals are infrequent.