US Dollar Index is once again gaining strength. The US Dollar Index (USDX) is an index that measures the strength of the US Dollar (USD) against a basket of other currencies. USDX was started in 1973 after the demise of the Bretton Woods System that put an end to fixed currencies regimes and ushered in free floating currencies where the price of the currency is determined by the forces of supply and demand in the currency market. The base value of USDX is 100.
USDX is often used as an analytical tool to determine the market sentiment for the USD although you can trade it as a futures contract just like gold, oil or currency futures contract. It is possible to incorporate futures and options trading strategies on USDX. You can trade futures and options contracts on USDX on the Intercontinental Exchange (ICE) as well as the New York Board of Trade (NYBOT). You can also invest in an ETF or a Mutual Fund that tracks the USDX. PowerShares offers two USDX based ETFs.
USDX is very useful for traders in the currency, bond and the gold markets. For example, a strong USD means falling gold prices. Both USD and the gold prices are strongly negatively correlated meaning both move in the opposite direction. So, the recent strengthing of the USD will be a cause of concern for those traders who have heavily invested in the gold market. Similarly increased demand for USD drives the value of USD up and often leads to a drop in the bond yields. So, USDX is an important intermarket tool for currency, bond and gold traders.
Adam Hewison, President of INO.com, Co-founder of MarketClub: “Is it time for the US Dollar Index to rally? The dollar index, which put in a strong performance in the first six months of the year, pulled back from its recent highs and appears to be in defensive mode. If you are not familiar with the US dollar index (USDX), it is an index, or measure, of the value of the United States dollar relative to a basket of foreign currencies. Its weighted geometric mean of the dollar’s value is compared with these currencies in the following percentages:
* Euro (EUR), 57.6% weight
* Japanese yen (JPY), 13.6% weight
* Pound sterling (GBP), 11.9% weight
* Canadian dollar (CAD), 9.1% weight
* Swedish krona (SEK), 4.2% weight
* Swiss franc (CHF) 3.6% weight
In this short educational USDX Video, I point out what we see in the dollar index and the reason why we think a potential rally may be in the foreseeable future. As always our videos are free to watch and there is no need for registration. If you’d like to make a comment on this or any of our videos, please go to the Trader’s Blog and let us know your thoughts.”