Investors can use the index to hedge general currency moves or speculate. The index is also available indirectly as part of exchange-traded funds (ETFs) or mutual funds. 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.
Initially, it included the Japanese yen, British pound, Canadian dollar, Swedish krona, Swiss franc, West German mark, French franc, Italian lira, Dutch guilder, and Belgian franc. The U.S. Dollar Index (USDX) is a relative measure of the U.S. dollars (USD) strength against a basket of six influential https://www.day-trading.info/best-cryptocurrencies-for-day-trading/ currencies, including the Euro, Pound, Yen, Canadian Dollar, Swedish Korner, and Swiss Franc. The USDX can be used as a proxy for the health of the U.S. economy and traders can use it to speculate on the dollar’s change in value or as a hedge against currency exposure elsewhere.
It is possible to incorporate futures or options strategies on the USDX. President Richard Nixon effectively ended this agreement in the early 1970s when he announced the value of the dollar would no longer be based on gold. From there, countries were free to “float” their currencies and allow markets to determine their value.
The U.S. Dollar Index has risen and fallen sharply throughout its history. Over the last several years, the U.S. dollar index has been relatively rangebound between 90 and 110. Commodity prices tend to fall (at least nominally) as the Dollar increases in value – and vice versa. Currency pairs, on the other hand, generally move in the same direction as the Dollar Index if USD is the base currency, and opposite direction if it is the quote currency – though these ‘rules’ do not always hold true. Here we can see that USD is the base currency in four of the six currency pairs included, with these given a positive value for the purposes of the calculation.
The US Dollar Index can be traded using futures and options or, where permitted, spread betting and CFD trading can also be used to speculate on whether the USDX will go up or down in price. Read more on how to trade US Dollar Index for technical strategies and tips. However, such a strong Dollar caused problems for US exporters, who found that their goods were no longer as competitive internationally. As a result, the US government took action to make the currency more competitive with five countries agreeing to manipulate the Dollar in the forex markets as part of the ‘Plaza Accord’. There are several popular exchange-traded funds (ETFs) that track the USDX.
UUP has more than $2 billion in assets under management and is extremely liquid, averaging more than 4.1 million shares of daily trading volume. The higher interest rates rise, the more demand there is for U.S. dollars from foreign investors, and that applies further upward pressure on the USDX. 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. In the coming years, it is likely currencies will be replaced as the index strives to represent major U.S. trading partners.
Since then, the US Dollar Index has tracked economic performance and liquidity flows. For example, it rose as the current account generated a surplus in the 1990s, fell as US debt levels increased in the 2000s, and rallied as investors flocked to the relative safety of the Dollar during the Great Recession. Dollar “pairs” at the same time, you would trade the index, which would rise and fall in line with the overall sentiment regarding the U.S.
It is likely in the future that currencies such as the Chinese yuan (CNY) and Mexican peso (MXN) will supplant other currencies in the index due to China and Mexico being major trading partners with the U.S. The contents of the basket of currencies have only been changed once since the index started when the euro replaced many European currencies previously in the index in 1999, such as Germany’s predecessor currency, the Deutschemark. The US Dollar Index was started by the Federal Reserve in 1973 and has been managed by ICE Futures US since 1985. It compares the value of the US Dollar against six currencies used by major US trade partners – the Euro (EUR), Japanese Yen (JPY), Pound Sterling (GBP), Canadian Dollar (CAD), Swedish Krona (SEK) and Swiss Franc (CHF). Inflation or deflation of any currency, monetary policy, geopolitical conflicts, and export/import ratios, just to name a few. The U.S. Dollar is the world’s reserve currency, and as such usually maintains high demand.
Since 1985, the dollar index has been calculated and maintained by Intercontinental Exchange (ICE). The euro is, by far, the largest component of the index, making up 57.6% of the basket. The weights of the rest of the currencies in the index are JPY (13.6%), GBP (11.9%), CAD (9.1%), SEK (4.2%), and CHF (3.6%).
- We do not include the universe of companies or financial offers that may be available to you.
- The index is affected by macroeconomic factors, including inflation/deflation in the dollar and foreign currencies included in the comparable basket, as well as recessions and economic growth in those countries.
- Wayne Duggan has a decade of experience covering breaking market news and providing analysis and commentary related to popular stocks.
- Investors can use the index to hedge general currency moves or speculate.
Presently, she is the senior investing editor at Bankrate, leading the team’s coverage of all things investments and retirement. Prior to this, Mercedes served as a senior editor at NextAdvisor. The Fed’s top priority in 2022 has been bringing down inflation from multi-decade highs, and its best weapon has been raising interest https://www.forexbox.info/td-ameritrade-an-overview/ rates. The Fed has already raised the fed funds rate to a range between 3% and 3.25%. In fact, the Federal Open Market Committee (FOMC) has issued three consecutive large rate hikes of 75 basis points. As a result, its calculation doesn’t include emerging market currencies, like the Mexican Peso (MXN) or commodity currencies.
US Dollar Index (DXY) Price Value Chart Today
The index is affected by macroeconomic factors, including inflation/deflation in the dollar and foreign currencies included in the comparable basket, as well as recessions and economic growth in those countries. Futures allow traders to hedge their accounts against currency risk and fluctuation in the U.S. Dollar or to simply wager that the index will move in one direction or the other.
Leveraged trading in foreign currency or off-exchange products on margin carries significant risk and may not be suitable for all investors. We advise you to carefully consider whether trading is appropriate for you based on your personal circumstances. This information is made available for informational purposes only. It is not a solicitation or a recommendation to trade derivatives contracts or securities and should not be construed or interpreted as financial advice. 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.
About US DOLLAR CURRENCY INDEX
The index started in 1973 with a base of 100, and values since then are relative to this base. It was established shortly after the Bretton Woods Agreement was dissolved. As part of the agreement, 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.
Understanding the U.S. Dollar Index (USDX)
News & World Report and a regular contributor for Forbes Advisor and USA Today. Goldman Sachs estimates S&P 500 companies generate about 29% of their total revenue from outside the U.S. Not surprisingly, analysts have tamped down S&P 500 revenue growth estimates for 2023. According to Yardeni swing trading strategies 3 simple and profitable strategies for beginners Research, the consensus estimate for the fourth quarter is +9%. “Foreign currency conversion can have a positive or negative effect on operating results. Now, the dollar index is very elevated and will ultimately serve as a headwind for overseas business of U.S. corporations,” Bevins says.
It also doesn’t include China’s renminbi (CNY), even though China is now the largest U.S. trading partner by a wide margin. Asher Rogovy, chief investment officer at Magnifina, says the USDX also has some shortcomings that investors should understand. ICE provides live feeds for Dow Futures that appear on Bloomberg.com and CNN Money. Dollar markets are open, which is from Sunday evening New York City local time (early Monday morning Asia time) for 24 hours a day to late Friday afternoon New York City local time. The USDX uses a fixed weighting scheme based on exchange rates in 1973 that heavily weights the euro.
