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26 Giugno 2023

What Is the U S. Dollar Index USDX and How to Trade It

what is the dollar index

If the dollar is strong, then Americans can buy more imported goods for their money. Supply and demand for currencies is heavily influenced by the monetary policies – particularly the interest rates – set by the central bank in each country. Other factors include inflation, economic performance, credit ratings, market sentiment and foreign affairs. The US Dollar Index – known as USDX, DXY, DX and USD Index – is a measure of the value of the United States Dollar (USD) against a weighted basket of currencies used by US trade partners. The index will rise if the Dollar strengthens against these currencies and fall if it weakens.

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  • The USDX allows traders and investors to monitor the purchasing power of the U.S. dollar relative to the six currencies included in the index’s basket.
  • Because the U.S. dollar is the world’s reserve currency and is generally considered a safe haven during periods of economic instability, investors have also been piling into the dollar for safety and security.

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. 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’. While we adhere to strict
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What is the US Dollar Index & Why is it Important?

However, the index has already gained a great deal of popularity and thus has become entrenched as a popular barometer for tracking the dollar’s value. Prior to the 1970s, there was little need for a dollar index as the value of the dollar was fixed to the price of gold. With the end of the gold standard in 1971, however, the dollar’s price began to freely fluctuate against other fiat currencies. Traders can also use leveraged currency ETFs to bet against weakening international currencies.

what is the dollar index

Before the creation of the dollar index, the dollar was fixed at $35 per ounce of gold, and it had been that way since the 1944 Bretton Woods Agreement. The index is currently calculated by factoring in the exchange rates of six foreign currencies, which include the euro (EUR), Japanese yen (JPY), Canadian dollar (CAD), British pound (GBP), Swedish krona (SEK), and Swiss franc (CHF). The exchange rate measures the relative strength or weakness of two different currencies. The dollar trade-weighted index shows how the U.S. dollar is doing against its trading partners.

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The WisdomTree Bloomberg US Dllr Bullish ETF (USDU) is another dollar fund that tracks the Bloomberg Dollar Total Return Index, an alternative to the dollar index. USDU is smaller and less liquid than UUP, but it charges a lower expense ratio of just 0.5%, compared to 0.77% for UUP. Since 1985, the dollar index has been calculated and maintained by Intercontinental Exchange (ICE). 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. Effective June 24, 2019, the Federal Reserve Board staff will make a change to the indexation of the daily Broad, AFE, and EME dollar indexes.

Tech stocks have the largest overall exposure to international markets of any S&P 500 market sector, with overseas revenue representing 59% of total sales, according to Goldman. Semiconductor company Qualcomm (QCOM) generates nearly all—96%—of its revenue internationally, while Facebook parent Meta Platforms (META) and Google parent Alphabet (GOOGL) generate more than half of their revenue overseas. 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. The Fed’s top priority in 2022 has been bringing down inflation from multi-decade highs, and its best weapon has been raising interest 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.

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There are a couple of different ways investors can get involved in trading the U.S. Get this delivered to your inbox, and more info about our products and services. Traders should make sure they fully understand how these derivative contracts work and the risks involved before they buy.


Professional investors use futures and options contracts to invest in the Dollar index. ICE offers dollar index futures for trading 21 hours a day on their platform. The exchange also offers USDX options contracts with six different expiration dates, ranging from one month to one year in the future. Fed Chairman Jerome Powell’s message at next week’s monetary policy meeting could also influence the dollar’s trajectory. “It’s really just the strength of the U.S. economy, relative to the rest of the world,” said Vassili Serebriakov, foreign exchange and macro strategist at UBS.

In the past year, the USDX has climbed 17.3% from around 94 to above 110. John Lynch, chief investment officer for Comerica Wealth Management, says the rapid strengthening of the dollar in 2022 has a number of causes that pose big challenges for investors and central banks around the world. An index value of 120 suggests that the U.S. dollar has appreciated disadvantages of video conference 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. The Trade-Weighted U.S. Dollar Index, also known as the Nominal Broad-Dollar Index, has been calculated by the Federal Reserve Bank since 1998.

what is the dollar index

The U.S. dollar is the world’s reserve currency, and as such usually maintains high demand. The strength of the dollar can be considered a temperature read of U.S. economic performance, especially regarding exports. The greater the number of exports, the higher the demand for U.S. dollars to purchase American goods. Our mission is to provide readers with accurate and unbiased information, and we have editorial standards in place to ensure that happens. Our editors and reporters thoroughly fact-check editorial content to ensure the information you’re reading is accurate.

This allows investors to hedge their exposure to the value of the dollar in a single transaction. Speculators can also use these products to make bets on future appreciation or depreciation of the dollar using a broadly-accepted and widely-quoted benchmark. “A combination of higher inflation, the Fed’s aggressive tightening campaign and a global search for yield have all contributed to the strong dollar,” Lynch says.

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While the U.S. dollar one is unique to the U.S., trade-weighted exchange-rate indexes are common in international economics. Bankrate follows a strict
editorial policy, so you can trust that our content is honest and accurate. The content created by our editorial staff is objective, factual, and not influenced by our advertisers. Any estimates based on past performance do not a guarantee future performance, and prior to making any investment you should discuss your specific investment needs or seek advice from a qualified professional.

The Chinese yuan and Mexican peso, for example, are both excluded from the Dollar Index. These are notable omissions, since those countries are the United States’ #1 and #3 largest trading partners, respectively. At the same time, Russia’s invasion of Ukraine has created economic uncertainty around the world, particularly in the European energy market. Because the U.S. dollar is the world’s reserve currency and is generally considered a safe haven during periods of economic instability, investors have also been piling into the dollar for safety and security. “The weightings of the currencies used to calculate the index were based on the United States’ biggest trading partners in the 1970s,” Rogovy says. The U.S. Dollar Index is a market index benchmark used to measure the value of the U.S. dollar relative to other widely-traded international currencies.

Keep reading to learn more on the US Dollar Index, how it is calculated, and what affects it price. Dollar Index includes the dollar’s relative value compared to a basket of foreign currencies. 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. Dollar Index (USDX), which helps investors understand the relative strength of the dollar. This key index helps them see how the dollar’s value impacts consumer prices, demand for imports and exports, and the condition of the economy as a whole. An overvaluation of the USD led to concerns over the exchange rates and their link to the way in which gold was priced.

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“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. The Federal Reserve, the central bank of the United States, provides the nation with a safe, flexible, and stable monetary and financial system. The US dollar has consolidated after the latest economic report suggested the Fed’s work may be coming to an end.The US dollar has consolidated after the latest economic report suggested the Fed’s work may be coming to an end.

Dollar Index Futures Discussions

Asher Rogovy, chief investment officer at Magnifina, says the USDX also has some shortcomings that investors should understand. Some U.S. companies are blaming the strong U.S. dollar for lackluster earnings, while economists say it’s helping the Federal Reserve’s ongoing fight against high inflation. 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%).

The ProShares UltraShort Euro (EUO) is designed to generate daily returns equal to double the inverse of the daily performance of the euro versus the U.S. dollar. Investors also use the dollar index as a litmus test for U.S. economic performance, particularly when it comes to imports and exports. The more goods the U.S. exports, the more international demand there is for U.S. dollars to purchase those goods. For instance, the Invesco DB U.S. Dollar Index Bullish Fund (UUP) is an ETF that tracks the changes in value of the US dollar via USDX future contracts. The Wisdom Tree Bloomberg U.S. Dollar Bullish Fund (USDU) is an actively-managed ETF that goes long the U.S. dollar against a basket of developed and emerging market currencies. 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.

This move could continue following the US retail sales tomorrow as economists are expecting a downtick in… By Michael S. Derby NEW YORK (Reuters) – Federal Reserve officials may have to revise higher forecasts of how far they’ll have to raise interest rates given the unexpected… Perhaps the simplest way to invest in the USDX is through an ETF that provides broad exposure to the dollar against several different foreign securities, like the USDX does. A few top choices are the WisdomTree Bloomberg US Dollar Bullish ETF (USDU) and the Invesco DB US Dollar Index Bullish Fund (UUP). Dollar Index was established by the Federal Reserve in 1973, the U.S. dollar was pegged against physical gold, and the world’s currencies accordingly against the dollar. When the U.S. dollar is used as the base currency, as in the example above, the value is positive.

Still, even staunch dollar bears are reluctant to bet against the currency. Other dollar rebounds this year, in March and May, failed at levels not far from where the dollar index trades now. The following chart shows the U.S. dollar index value from the elimination of the gold standard in January 1971 to January 2022.

The rise of the euro replaced the former monies of various prominent European nations including Germany, France, Spain, and Italy. It’s hard for market historians to calculate the value of the dollar against pre-euro currencies due to this fact. The Dollar Index, however, gives analysts an easy way to deduce the relative value of the dollar at any given point since 1973 even though many of the currencies it traded against are no longer in existence. For investors wanting an alternative, the Federal Reserve has created a trade-weighted measurement of the dollar with a different set of underlying currencies. However, it has not gained the same level of mainstream popularity as the older Dollar Index. Notably, the index leaves out several prominent currencies that are either major global players or major U.S. trading partners.

Category: Forex Trading

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