The U.S. dollar index (USDX) is a measure of the value of the U.S. dollar against a basket of six world currencies – Euro, Swiss Franc, Japanese Yen, Canadian dollar, British pound, and Swedish Krona – otherwise known as the U.S’s most significant trading partners.
The value of the index is a key indicator of the dollar’s value across global markets. Similar to other trade-weighted indexes, USDX also uses the exchange rates from the same major currencies.
History of the US Dollar index
In 1973, the USDX was established by the Federal Reserve, shortly after the Bretton Woods Agreement dissolved, and has been managed by ICE Futures US since 1985. Starting with a base of 100, with values since then relative to this base. Participating countries settled their balances in U.S. dollars (which was used as the reserve currency), while the USD was fully convertible to gold at a rate of $35/ounce.
As a result of an overvaluation of the USD, concerns over the exchange rates and their link to how gold was priced started to surface. At the time, President Richard Nixon decided to temporarily suspend the gold standard, at which point other countries were able to choose any exchange agreement other than the price of gold. An end to the agreement was finally put in place in 1937 after several foreign governments chose to let their currency rates float.
How is the index calculated?
By factoring in the exchange rates of the six major world currencies stated above. The largest component of the index is the EUR making up almost 58 percent of the basket (57.6%).
The weights of the remaining currencies in the index are as follows: JPY (13.6%), GBP (11.9%), CAD (9.1%), SEK (4.2%), and CHF (3.6%).
In the 1970s, the index fluctuated between 80 and 110 as the US economy struggled through rising inflation and a tough recession. Interest rates were increased by the Fed in an attempt to reduce inflation in the late 1970s, with money flowing into the US Dollar – causing the USD Index to jump.
What factors influence the price of the USDX?
The USD Index is mainly affected by the supply and demand of the US dollar and the other currencies that form the basket. The supply and demand for these currencies are largely influenced by the monetary policies and their interest rates, which are set by the central banks in each respective country.
Due to a high volume of income/export activities in today’s world, the DXA and most major indices react to factors that occur globally, such as economic news, inflation, economic performance, credit ratings, market sentiment, political upheaval and even natural disasters.
Each of these factors will impact demand and supply related to import and export activities in the various sectors represented under the index, which in turn influences the price of the index as a whole.
To make informed trades, it’s important to stay on top of economic data coming out of the US and each of the respective countries in the basket.
Look out as well for figures on job creation, unemployment, GDP and of course interest rates out of the US and the other countries in the basket.
Why is the USDX important for traders?
The US Dollar Index is important for traders both as a market in its own right as well as being used as a key indicator of the strength of the US Dollar around the world.
It’s not only used in technical analysis to confirm trends related to the following markets but also the following:
- Currency pairs that include the US Dollar
- Commodities priced in USD
- Stocks and indexes
Many traders use this index as a way to try to hedge risk – for example, offsetting some of the risk associated with a long USD/GBP trade by going short on the Dollar Index.
How can I trade the USDX index?
The USDX is tradable as a single asset with TIOmarkets under the ticker DXA.
Check what other assets are available for trading.
What are the best trading conditions for the USDX?
As we’ve seen with the recent pandemic, both currencies and indices can be prone to large swings up or down based on economic turmoil, recovery and economic
Trade protection: Using risk tools like a stop loss can help to protect your trades against sudden adverse price movements.
Execution speeds: Slow order execution speeds can lead to a big difference between the price you see when you click to open a trade, and the actual price your order is opened at. This difference between prices is called “slippage”.
At TIOmarkets, we have some of the fastest execution speeds you can find, resulting in minimal slippage and more orders filled at the price you clicked.
Leverage: Normally, a large amount of starting capital is required to invest seriously in stocks and indices, because only a small amount of stocks is not likely to yield the kind of results most traders are seeking.
High leverage can greatly increase both the risk to your investment and the potential returns.
If you are comfortable with a high level of risk in return for higher potential gains, you may want to seek a leverage ratio that is commensurate to your investment goals.
Register for an account with www.tiomarkets.com or fund your existing account with us to start trading with one of the most trusted and reputable brokers around.
Risk disclaimer: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money. Never deposit more than you are prepared to lose. Professional client’s losses can exceed their deposit. Please see our risk warning policy and seek independent professional advice if you do not fully understand. This information is not directed or intended for distribution to or use by residents of certain countries/jurisdictions including, but not limited to, USA & OFAC. The Company holds the right to alter the aforementioned list of countries at its own discretion.