EUR/USD And US Dollar Index

As a forex trader, have you ever used the US Dollar Index in your trading? Many traders don’t know how to use it in their trading. Read this article to find out how you can use it to trade some of the most heavily traded currency pairs in the market. Don’t know anything about the US Dollar Index? Well, US Dollar Index is a basket of currencies that is used to measure the strength of the US Dollar (USD). The basket that is used to measure the strength of US Dollar comprises of EURO (EUR), Japanese Yen (JPY), British Pound (GBP), Canadian Dollar (CAD), Swedish Krona (SEK) and the Swiss Franc (CHF). Their respective waits are EUR 57.6%, JPY 13.6%, GBP 11.9%, CAD 9.1%, SEK 4.2% and CHF 3.6%. You must have observed that the heaviest weight goes to EUR.

US Dollar Index symbol is $DXY and is popularly known as the Dixie. US Dollar Index Futures contracts get traded on the ICE Futures Exchange formerly the New York Board of Trade (NYBOT). One thing you must have observed is that this index is heavily weighted against the EURO. This is due to the fact that before the EURO inception, this index contained the French Franc, the German Mark, Italian Lira and other European currencies. But when EURO came into existence as the single currency of the EMU in 1999, it replaced all the above currencies. Hence, the heavy tilt against this single currency.

One thing that you must know is that USDX is heavily tilted in favor of the EURO. So, you can use it in trading the EUR/USD pair. USDX measures the strength of USD while EUR/USD measures the strength of EURO. What this means is that the US Dollar Index and the EUR/USD move in opposite directions.

So, how can we use the USDX in trading EUR/USD pair, the most popular pair amongst the forex traders. Suppose, you find EUR/USD in a downtrend on the intraday chart like the 60 minutes chart. EUR/USD pair is hitting resistance on the 60 minutes chart. You check up on the USDX chart. The US Dollar Index is in an uptrend. Remember, both move in the opposite directions. USDX is hitting support. This is a good confirmation that you can go short on the EUR/USD pair.

Now, we take a situation where just by looking at the USDX chart we know that it is not a good time to trade EUR/USD. Suppose, EUR/USD has been trending for a long time and is on the verge of a breakout! You find a the head and shoulder pattern forming nicely. This means that market has reached its top and a downtrend will soon develop or will it. You need a confirmation.

You check your observation on EUR/USD chart by taking a look at the USDX weekly chart. USDX is also showing an uptrend with a head and shoulder formed meaning a new trend in the down direction. When USDX moves down, it means the market is bearish on USD.

EUR/USD chart indicates a bullish USD while US Dollar Index Chart indicates a bearish USD. Both these observations are contradicting each other. Don’t enter into a EUR/USD short trade. This is how you can use the US Dollar Index in trading EUR/USD pair. Get this profitable Magic Breakout Forex Strategy by Tim Trush and Julie Lavrin FREE! Learn this powerful Fibonacci Retracement method FREE that pulls 500+ pips per trade!