US Dollar Index ($DX)
The US Dollar Index is an average of six foreign currencies, weighted in accordance with somebody’s perception of their relative importance in the year 1973, when the world’s major nations first let their currencies start to float “freely” against one another:
The US dollar index (USDX) is a method for gauging the relative strength of the dollar, in much the same way as the FTSE 100 can be used to gauge the relative strength of the UK stock market. It’s basically an average of the exchange rates between the dollar and a ‘basket’ of six other major currencies, with some of these currencies having more importance than others. These are the:
- Euro (EUR)
- Japnesese yen (JPY)
- British pound (GBP)
- Canadian dollar (CAD)
- Swedish krona (SEK)
- Swiss franc (CHF)
This accounts for the currencies of 22 countries, with 17 of these using the same currency (the euro). Although these countries only account for a small proportion of the global population, there are many other currencies in the world that mirror the US dollar index quite closely, which makes the index a very useful tool for measuring the global strength of the US dollar.
In 1973, the US$ Index started with a base of 100 for the US dollar. On Friday, September 28, 2007, for the very first time, the figure fell below 78, the previous low-water mark set long ago. That means that the dollar has decreased in value by over 22% versus those six currencies since 1973.
The Dollar Index broadly reflects the dollar’s standing compared to the other major currencies of the world. It is widely used to hedge risk in the currency markets or to take a position in the US Dollar without having the risk exposure of a single currency pair.
The highest point it ever reached was 121.29 on July 6, 2001. From it’s high to the low of September 28 is a fall of 36% in 6 years.
A measure of the value of the U.S. dollar relative to majority of its most significant trading partners. This index is similar to other trade-weighted indexes, which also use the exchange rates from the same major currencies.
Currently, this index is calculated by factoring in the exchange rates of six major world currencies: the euro, Japanese yen, Canadian dollar, British pound, Swedish krona and Swiss franc. This index started in 1973 with a base of 100 and is relative to this base. This means that a value of 120 would suggest that the U.S. dollar experienced a 20% increase in value over the time period.
It is possible to incorporate futures or options strategies on the USDX. These financial products currently trade on the New York Board Of Trade.
The USDX is very useful for forex traders because it tells you how strong the dollar is against other major currencies. However, because it is so heavily weighted towards the euro, it doesn’t always paint an accurate picture of the dollar’s true global strength, particularly in terms of how competitively priced US goods are against those of other countries. That’s why the Federal Reserve invented a new kind of dollar index in 1998 called the ‘trade-weighted U.S. dollar index’.