The US Dollar Index (USDX) is the ratio of the US dollar (USD) to a basket of six major foreign currencies – the euro, the Japanese yen (JPY), the pound sterling (GBP), the Canadian dollar (CAD), the Swedish kroner (SEK) and the Swiss franc (CHF).
The base value of the USDX index was the level of 100.00.
The index is calculated as the geometric weighted average of these currencies according to the formula:
USDX = 50,14348112 * USDEUR (0,576) * USDJPY (0,136) * USDGBP(0,119)
*USDCAD (0,091) * USDSEK (0,042) * USDCHF (0,036)
The coefficients in parentheses correspond to the percentage weights of currencies in the basket:
Euro – 57.6%;
Yen – 13.6%;
The pound sterling – 11,9%;
The Canadian dollar is 9.1%;
Swedish krona – 4.2%;
The Swiss franc is 3.6%.
The first coefficient in the formula (50.14348112) gives the value of the index to 100 on the date the reference began, when the main currencies began to be freely quoted relative to each other. USDX has been calculated since March 1973 and the calculation formula has changed once in connection with the introduction of the Euro. Accordingly, in almost all trading systems, USDX quotations begin in 1999.
Trades on the dollar index occur around the clock on the Intercontinental Exchange in the form of a futures contract, as well as through traded funds (ETF) and options. Many Forex brokers offer direct trading in the index as a price difference (CFD) contract.
Since the dollar index reflects the value of the basket of currencies relative to the US dollar, USDX gives a clear idea of the strength or weakness of the dollar as a whole in the foreign exchange market. However, the share of the single European currency in the index is 57.6%, which actually makes the dollar index – “anti-euro”. Look at the chart USDX (blue line) and EURUSD (inverted).
For clarity, the pair EURUSD is represented in the opposite form – USDEUR (red line). We see a very high degree of correlation. Thus, USDX can be used in some kind of arbitrage for the EURUSD pair. If the index begins to move, then with a high probability the pair EURUSD will go in the opposite direction.
Also interesting is the interdependence of USDX and the yield spread between the 10-year government bonds of the USA and Germany.
As we see before mid-2017, there was a fairly clear correlation between the dynamics of USDX and the spread of 10-year government bonds of the United States and Germany (green line). However, since July 2017 this connection has been violated and at the moment there is a critical discrepancy. This was due to the growth of the Euro on expectations of tightening monetary policy on the part of the ECB. In my opinion, this discrepancy should be leveled, only because of what factors. The spread of bonds, given the cycle of raising interest rates in the US and maintaining the ECB’s monetary policy at least until the end of 2018, will decrease with a low probability. There must be significant reasons for this, which will force investors to avoid risks and buy bonds – a military conflict involving the United States, a recession in the economy, a drop in the stock market, etc. There remains the Euro rate. In my opinion, it is significantly overbought and we can expect a correction down to levels 1.10-1.15.
To analyze the dynamics of the USD index, you can apply all standard methods of technical analysis and indicators, as to any currency pair. Do not forget, it is actually traded on the stock exchange. In the chart below, I applied simple moving averages with a period of 100 to H1 and a period of 200 H4, support and resistance levels, channels. How to use moving averages from different timeframes read in this article. The MACD indicator with parameters 16-32-5 is also used.
The MACD indicator is supplemented by the arrow indicator of divergences. How to do it, see here. The index, like any currency pair, clearly forms the levels of support and resistance, its dynamics fully complies with the rules of trend movement in any financial market.
Thus, the USDX analysis allows you to get confirmation of one or another trend in the Forex market. I constantly use it in analysis and when opening trading positions. Examples of such analysis are available on the links below.
If the USDX tool is not available in your trading terminal and the broker does not provide its quote, you can follow the index on a special page of our site or use the free Internet service TradingView for analysis. Ticker index there DXY.
To be fair, it should be noted that USDX is not the only US dollar index. For example, the Fed calculates its more comprehensive index TWEXB – (trade-weighted US dollar index). It is calculated in several variants – at a nominal and real exchange rate and includes the US dollar exchange rate against the exchange rates of the 26 largest countries in the world. More details you can read about it here. This index is not traded as a financial instrument and therefore it did not receive such spread as USDX.
Be prudent, observe risk management and trade in a plus.