Understanding and Trading US Dollar Index

By February 2, 2015 Newsletter No Comments

“Believe me, the next step is a currency crisis because there will be a rejection of the dollar, the rejection of the dollar is a big, big event, and then your personal liberties are going to be severely threatened.” Senator Ron Paul

The US Dollar Index (USDX) is an index (or measure) of the value of the United States dollar relative to a basket of foreign currencies.

US dollar Index

It is a weighted geometric mean of the dollar’s value compared only with

  • Euro – EUR – 58.6% weight
  • Japanese Yen – JPY – 12.6% weight
  • Pound Sterling – GBP – 11.9% weight
  • Canadian Dollar – CAD – 9.1% weight
  • Swedish Krona – SEK – 4.2% weight and
  • Swiss Franc – CHF – 3.6% weight

The makeup of the “basket” has been altered only once, when several European currencies were subsumed by the Euro at the start of 1999.

USDX started in March 1973, soon after the dismantling of the Bretton Woods system. At this time the world’s largest nations met and agreed to allow their currencies to float freely against each currency. At its start, the value of the US Dollar Index was 100.000. It has since traded as high as 148.1244 in February 1985, and as low as 70.698 on March 16, 2008, the lowest since its inception in 1973.

USDX goes up when the US dollar gains “strength” (value) when compared to other currencies. Since Euro is heavily weighted in the US Dollar Index, therefore, when Euro goes up Dollar Index goes down. As of this writing US Dollar Index is trading at $80.000. This means it has fallen 20% since its inception. If US Dollar Index was trading at $105 then it would have meant that it has risen 5% since its inception.

The makeup of the “basket” has been altered only once, when several European currencies were subsumed by the Euro at the start of 1999.

As currency traders know that currencies are traded in pairs. Therefore, USD can be traded against major currencies of the world such as EUR/USD, GBP/USD, USD/CHF, USD/JPY, and USD/CAD.

Even if you do not trade currency and trade equity it is prudent to know where USDX stands.

USDX is updated whenever US Dollar markets are open, which is from Sunday evening New York time (early Monday morning Asia time) for 24 hours a day to late Friday afternoon New York time.

USDX can be traded as a futures contract on the Intercontinental Exchange (ICE). It is also available in exchange traded funds (ETFs), options and mutual funds.

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