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The US Dollar Index (DXY) measures the value of the Dollar against a basket of currencies on a trade-weighted basis.
US Dollar Index (DXY) History
The index started in March 1973 with a base value of 100. Since then, it has made a high of 164.72 in February 1985, and a low of 70.69 in March 2008.
The weighting of the basket has been altered only once. In 1999, the introduction of the Euro replaced many European currencies in the index. As of more recent, it is viewed that the index has become outdated, and currencies that have experienced higher volumes should be included in the index. In the future, it is likely that the Chinese Yuan and Mexican Peso will be included, as both economies are major trading partners with the United States.
Which Currencies are Included in the US Dollar Index?
There are six currencies, that combined, form the value of the index. The currencies are weighted according to their trading volumes relative to total volumes in the Foreign Exchange market.
The index is split as follows as of July 2016:
- Euro 57.6%
- Japanese Yen 13.6%
- Pound Sterling 11.9%
- Canadian Dollar 9.1%
- Swedish Krona 4.2%
- Swiss Franc 3.6%
Trading volumes in the markets constantly change, and the current weighting will likely be updated when further currencies are added to the index.
Where Can You Trade the DXY?
Not all brokers offer the US Dollar Index as a trading instrument. The index can be traded in the futures market on the Intercontinental Exchange (ICE), with the ticker symbol USDX.
There are also CFD’s offered based on the underlying futures price. CFD’s have become a popular way to trade indices, commodities, and even shares. As brokers continue to expand into the CFD market, trading on the US Dollar Index has gained popularity.
Types of US Dollar Indices
Aside from DXY, there are other indices that track the performance of the US Dollar.
- The Wall Street Journal Dollar Index (BUXX) is an index comprising of 16 currencies and was last updated in December 2013. Prior to the update, the index consisted of seven currencies. Data for the index is provided by the Bank for international settlements (BIS).
- The Dow Jones-FXCM Dollar Index (USDOLLAR) consists of four equally weighted currencies: Euro, British Pound, Japanese Yen, and Australian Dollar. The index began in January 2011 at a starting value of 10,000.
- The Broad Index is a trade-weighted index used by the Federal Reserve to measure the performance of the US Dollar against a basket of 16 currencies. The central bank created the index as it was viewed that weighting in DXY overemphasized the Euro. The index is not traded, and thus does not carry a ticker symbol.
Because the weighting of the index puts emphasis on the Euro, the EUR/USD tends to have an inverse relationship to the DXY. During times of high volatility in other currencies, namely during news or political events, the correlation tends to diverge. There is often a period of divergence between the index and exchange rate when big tops or bottoms are made.
What Factors Affect DXY?
Speculation over the US dollar has the largest impact on the US Dollar Index. When there are changes to the US central bank’s monetary policy, market participants may look to trade the index as an alternative to a currency pair, for the purpose of diversifying risk.
Fluctuations in the Euro and Japanese Yen drive the index to a degree, while other currencies tend not to move DXY as much because of their small relative weighting in the index.
When Does DXY Experience Volatility?
DXY tends to experience volatility in the North American session, and often right at the open. The overlap of the European and North American session causes higher trading volumes during this time. US economic releases tend to be released in the overlap as well, adding to the volatility.
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