Understanding the US Dollar Index

The U.S. Dollar Index (USDX, DXY, DX, or, informally termed “the Dixie”) is a measure of the value of the United States dollar relative to a basket of foreign currencies. It is often used as an indicator of the overall strength or weakness of the U.S. dollar in the foreign exchange market. 

Changes in the index value reflect shifts in the relative strength of the U.S. dollar compared to the other currencies in the basket. If the index rises, it suggests that the U.S. dollar is strengthening against the other currencies, and if it falls, it indicates a weakening dollar.

The index is calculated using a geometric mean of the exchange rates between the U.S. dollar and a selected specific group of six major currencies. 

A common misconception is the component currencies reflect what are commonly thought of as including the currencies that comprise the so called “majors”.  However, the currencies that make up this basket are, the Euro (EUR), Japanese yen (JPY), British pound (GBP), Canadian dollar (CAD), Swedish krona (SEK), and Swiss franc (CHF) ONLY. 

These currencies are then weighted based on their importance in international trade and financial markets to create a quoted overall numerical value, and changes in this value may plotted on a chart as with any other tradable asset class over a set period of time. 

Here are the weightings of currencies that make up the USD index currently:

1. Euro (EUR) – Weight: 57.6%
2. Japanese Yen (JPY) – Weight: 13.6%
3. British Pound (GBP) – Weight: 11.9%
4. Canadian Dollar (CAD) – Weight: 9.1%
5. Swedish Krona (SEK) – Weight: 4.2%
6. Swiss Franc (CHF) – Weight: 3.6%

Please keep in mind that these weightings are subject to change, albeit infrequently, and it’s recommended to refer to reliable financial sources for the most up-to-date information on the U.S. Dollar Index components and their respective weightings.

The impact of the USD on other asset classes

The U.S. Dollar Index (USDX) can have a significant impact on various asset classes, as changes in the value of the U.S. dollar relative to other major currencies can influence global financial markets and economic conditions. Here’s how the USDX can affect different asset classes:

1. Foreign Exchange (Forex) Market:
   • Currency Pairs: The most direct impact of the USDX is on currency pairs. When the USDX strengthens, the U.S. dollar is gaining relative to other currencies in the basket. Bear in mind that this strength may neither be uniform against individual currencies nor in the degree of price move in specific USD crosses nor even, on occasion, in the same direction.
2. Commodities:
   • Commodity Prices: A stronger U.S. dollar can put downward pressure on commodity prices. Commodities like gold, oil, and copper are often priced in U.S. dollars globally. A stronger dollar can make these commodities more expensive for holders of other currencies, hence often there is an inverse relationship to some degree on how these move versus the USD.
   • Gold is often seen as a hedge against a weakening U.S. dollar. When the dollar strengthens, gold can become relatively less attractive to investors seeking safe-haven assets, potentially leading to lower gold prices.
3. Equity Markets:
   • U.S. Stocks: A stronger dollar can impact multinational companies’ earnings negatively. When the dollar appreciates, the overseas profits of U.S. companies become worth less when converted back to dollars, potentially leading to lower corporate earnings.
   • Emerging Markets: Many emerging market economies borrow in U.S. dollars. If the U.S. dollar strengthens, the debt servicing costs for these economies can rise, leading to economic challenges. As a result, some emerging market stocks can experience increased volatility or even significant economic pressure over time.
4. Bonds:
   • U.S. Treasuries: The value of U.S. Treasury bonds can be influenced by the USDX. A stronger dollar can attract foreign investors seeking higher yields, potentially driving up demand for U.S. Treasuries and affecting bond prices.
5. Interest Rates and Central Banks:
   • US Federal Reserve Policy: The strength of the U.S. dollar can influence the decisions of the U.S. Federal Reserve regarding interest rates. A stronger dollar might give the Fed room to consider tighter monetary policy, while a weaker dollar might lead to more accommodative policies.

It’s important to note that market dynamics are complex and influenced by a multitude of factors only one of which may be the USD. Other factors such as economic data, geopolitical events, and central bank actions also have significant impacts on various asset classes, often more so than the USD itself, and indeed may in turn influence the USD.

Trading the USD index

There are a few ways you can trade the USDX:

1. Futures Contracts: The most direct way to trade the USDX is through futures contracts. These contracts are traded on exchanges like the Intercontinental Exchange (ICE). They allow you to speculate on the future value of the USDX without actually owning the underlying currencies. The UDX futures trade on the ICE (Intercontinental Exchange, Inc.) for 21 hours a day.
2. Exchange-Traded Funds (ETFs): Some ETFs track the performance of the USDX. These ETFs attempt to replicate the movements of the index and can be bought and sold on stock exchanges like regular stocks. The most liquid of these is UUP.
3. Options: Contracts allow you to buy or sell options on the USDX at a specified price before or on a certain date. 
4. Contracts for Difference (CFDs): CFDs are derivative instruments that allow you to speculate on price movements without owning the underlying asset. We offer CFDs on the USDX futures contract, which can enable you to go long or short the asset.

As part of the extensive product suite offered by GO Markets you have the opportunity to trade both the ETF referenced above, and the USD index (ticker code USDOLLAR).

(Keywords: Forex, USD, US dollar, US dollar index, USDX, DXY, Futures contract)