Posted by: Maj Gatungay
Category: Forex Trading

The U.S. Dollar Index consists of a geometric weighted average of a basket of foreign currencies against the dollar. The U.S. dollar index allows traders to monitor the value of the USD compared to a basket of select currencies in a single transaction. It also allows them to hedge their bets against any risks with respect to the dollar.

  1. Leveraged trading in foreign currency or off-exchange products on margin carries significant risk and may not be suitable for all investors.
  2. The DXY refers to the US Dollar Index, which is the global benchmark for the value of the US dollar measured against a basket of foreign currencies.
  3. The DXY Dollar Index was created by the US Federal Reserve in 1973, after the Bretton Woods system of payments based on the dollar came to an end.
  4. Because in this case, even a huge issue of USD from a historical point of view will not cause a decline in the US currency if other currencies depreciate even more.

This data-driven understanding of DXY will guide your currency trading decisions. The Dollar Index, or DXY as it’s commonly known, is a measure you’ll need to understand to gauge the value of the U.S. dollar against a basket of foreign currencies. This index is based on a weighted geometric mean of the dollar’s value compared to the Euro, Japanese Yen, British Pound, Canadian Dollar, Swedish Krona, and Swiss Franc.


Any examples given are provided for illustrative purposes only and no representation is being made that any person will, or is likely to, achieve profits or losses similar to those examples. DailyFX Limited is not responsible for any trading decisions taken by persons not intended to view this material. The US Dollar index chart can be used not only for assessing the current USD trend but also for finding additional trading signals.

It should help to reflect the fact that the USA is currently actively trading with such countries as China, South Korea, Mexico, Brazil, and Australia. Furthermore, it is prudent to have individual trades to a maximum of 1% of the trading account. This is a simple way to safeguard that only high-probability trades are entered into and has the added advantage of absorbing losses along the way without jeopardizing the trading account.

DXY Overview

The vast majority of trades across all financial markets is done with the US dollar. Knowing its current value against other currencies can help you plan for more profitable trades. Dollar Index trading is a great way for investors to gain exposure to the US dollar and take a position on the US economy and/or the global market. The value of the DXY Index is calculated in real-time approximately every 15 seconds based on spot prices of the constituent currencies. The calculation takes the midpoint prices between the bid and offer for each currency.

The Dollar Smile Theory as a trading strategy

The US Dollar Index is a very important indicator that allows traders to see the changes to the value of the USD in real time. This index can help you predict price movements of major currency pairs on the Forex market and find opportunities to enter Forex trades. In conclusion, the DXY is a widely used index in the forex market that measures the performance of the U.S. dollar against a basket of other currencies. The index is a valuable tool for forex traders as it provides a comprehensive view of the performance of the U.S. dollar and allows for informed trading decisions. The DXY is also used by central banks and governments to monitor the performance of their currencies against the U.S. dollar.

Important legal documents in relation to our products and services are available on our website. You should read and understand these documents before applying for any AxiTrader products or services and obtain independent professional advice as necessary. European currencies are dominating the index, while Asian currencies are underrepresented. This is the reason why different Dollar indices consisting of a basket of other currencies might rise to prominence in the future.

When investors become risk averse, they will regularly try “safe havens” like gold, or in this instance, the US Dollar. As an outcome, the US Dollar arrangements long and well-established tendencies that professional traders are intelligent to take benefit of. The remnants of this guideline attention to how to trade such trends and make alpari international review known the Dollar Smile Theory which provides a description of the reality of trends in the US Dollar. Once the US economy also rebounds, investors start enjoying the GDP growth and expect higher interest rates in the future, making the USD an attractive asset again. The USD becomes weak when the global economy recovers from a recession.

Invesco’s bullish and bearish ETFs – UUP and UDN are two of such funds tradable on the stock market. The DXY originated in March of 1973, shortly after the dismantling of the Bretton Woods system; a unified fixed rate system between the Allied Nations, shortly after the second world war. At this point the DXY hit its all-time high of 164.72, as a result of the first ever DXY futures trading. The DXY would eventually hit it’s all time low of 70.57, in March of 2008. Forex traders shrugged off a hotter-than-expected consumer price figure for December, leading the dollar lower.

This was triggered by the end of the gold standard and the floating of currency exchange rates. The prices of the DX futures contracts are set by the market, and reflect interest rate differentials between the respective currencies and the U.S. dollar. The U.S. Dollar Index can be traded as a futures contract for 21 hours a day on the ICE platform. The U.S. Dollar Index futures contract derives its liquidity directly from the spot currency market, estimated to have a turnover of over $2 trillion daily.

It also is the parent company of the well-known New York Stock Exchange. These financial products currently trade on the New York Board of Trade. Investors can use the index to hedge general currency moves or speculate.

However, if a trader plans to use the US Dollar Index to bet on the direction of the Dollar, they must always be mindful of the basket and the weightings. Dollar Index as it allows them to monitor the value of the Greenback compared to a basket of major currencies. If a trader is convinced the US Dollar will appreciate across the board, it might be simpler to place a single trade betting on a rising US Dollar Index instead of having to manage multiple forex positions. Some market participants also use the US Dollar Index for hedging purposes. Find out more on how to trade indices to benefit from the USDX price movement.

As an example, The DXY will rise whenever the USD is mentioned on television, in a positive light. In the same way, the DXY will lower in value when dollar-negative news – such as war casualties – are at the forefront of the media. Even though the DXY will never correlate one hundred percent with dollar-negative or dollar-positive news, the news and the DXY coincide regularly enough to provide palpable data. You can also apply direct Technical Analysis to the DXY, in order to calculate how the DXY is going to move. US central bank is expected to hold borrowing costs steady on Wednesday. Prior to the introduction of the euro in 1999, the US Dollar Index included the West German mark, the French franc, the Italian lira, the Dutch guilder and the Belgian franc.

The index is also available indirectly as part of exchange-traded funds (ETFs) or mutual funds. An index value of 120 suggests that the U.S. dollar has appreciated 20% versus the basket of currencies over the time period in question. Simply put, if the USDX goes up, that means the U.S. dollar is gaining strength or value when compared to the other currencies. The lowest point in the smile reflects a weaker US Dollar as a result of strained fundamentals. Sluggish economic growth could invite interest rate cuts, further weakening the currency. When investors become risk averse they will often turn to “safe havens” such as gold, or in this case, the US Dollar.

This website is using a security service to protect itself from online attacks. There are several actions that could trigger this block including submitting a certain word or phrase, a SQL command or malformed data. A rising DXY often means EUR/USD is dropping, as the index is heavily influenced by this pair. In essence, understanding the DXY lets you keep your finger on the pulse of the global economy. Additionally, you’ll find fluctuating peaks and troughs in the line graph, which represent the highest and lowest points the DXY reached during a specific period. By analyzing these peaks and troughs, you can discern the volatility and trend of the dollar index.

Maj Gatungay

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