DXY definition What does it measure and how to use it in Forex?
It’s very similar to how the stock indices work in that it provides a general indication of the value of a basket of securities. If you’ve traded stocks, you’re probably familiar with all the indices available such as the Dow Jones Industrial Average (DJIA), NASDAQ Composite Index, Russell 2000, S&P 500, Wilshire 5000, and the Nimbus 2001. Then foreign investors buy shares of relevant companies or ETFs that characterize the success of individual sectors. And it leads to the strengthening of the USD – that is, the DXY index is rising. Once the US economy also rebounds, investors start enjoying the GDP growth and expect higher interest rates in the future, making the USD an attractive asset again. However, if traders had entered a buy trade in USDCHF at the same time as the US dollar index flag’s breakout happened, they would have caught a solid pump.
The Dollar Smile Theory was first observed by Stephen Jen, a former currency strategist, and an economist at Morgan Stanley. It attempts to explain why the US Dollar strengthens in periods when the US economy is thriving, as well as, in periods of worsening global economic conditions. The pattern resembles a smile and plays out in three stages, as shown below. In contrast, when a component currency pair is quoted like EUR/USD, with the foreign currency before the slash and the USD after it, then the U.S.
- Now that the downtrend has been established, we can look for entries to sell (depicted in the red zone).
- The prices of the DX futures contracts are set by the market, and reflect interest rate differentials between the respective currencies and the U.S. dollar.
- Dollar Index trading is a great way for investors to gain exposure to the US dollar and take a position on the US economy and/or the global market.
- It is no wonder that the US dollar has its own index which evaluates its value against other global currencies.
- Currency demand is affected by monetary and trade policy as well as economic growth, inflation, geopolitical events, and broad financial market sentiment.
The calculation takes the midpoint prices between the bid and offer for each currency. The US Dollar index (DXY or USDX) is an aggregated indicator of the leading wizardsdev global currency cost relative to a basket of other foreign currencies. Technically, the index can be compared with stock indices, such as Dow Jones or S&P 500.
How to Trade the USDX
The weight of the EURUSD currency pair in the dollar index is 57.6%. This characterizes the high dependence of the DXY index on the monetary policy of the Eurozone and other sentiments of the euro currency. The chart below shows the dynamics of both instruments over 20 years, starting from January 2000. The US dollar index (ticker denoted as DXY or USDX) is used when analyzing the strength of the US currency against other currencies. The US Federal Reserve System (FRS) uses the dollar index to assess the success of monetary policy and make forecasts.
- The U.S. Dollar Index can be traded as a futures contract for 21 hours a day on the ICE platform.
- For understanding, let’s imagine an example that there are 1000 units of USD and 10,000 units of EUR.
- Therefore, when you trade DXY using CFDs, you speculate on the direction of the underlying asset’s prices without actually owning it.
- In this article, you’ll be introduced to the US Dollar index, which shows dynamic patterns of the American currency and helps to find additional signals for Forex trading.
- The DXY, or the US dollar index, is an index that tracks the performance of the greenback against other currencies, such as the Japanese yen, Swiss franc, Swedish krona, British pound, Canadian dollar, and an euro.
- The Chinese Yuan and Mexican Peso are highly nominated to be included in the index.
The prices of the DX futures contracts are set by the market, and reflect interest rate differentials between the respective currencies and the U.S. dollar. The index is particularly useful for traders in the bond, currency and gold markets. For example, a strong USD is usually correlated with falling gold prices, which means that gold traders are very interested in a break out on the dollar even though they may not be trading it directly. Thanks to this list, it can be determined that the change in the EUR/USD exchange rate has the greatest impact on the dollar index, and the least — USD/CHF.
USDX vs. DX vs. DXY
Using CFDs for DXY trading allows you to trade the index in both directions; you can hold a long or short position, depending on whether you expect the price of an asset to rise or fall. The first is UUP which will move the same direction as the dollar. If uncertainty were to increase or some unforeseen global crisis appears in 2010, this ETF could be a good bet. Invesco’s bullish and bearish ETFs – UUP and UDN are two of such funds tradable on the stock market.
Additionally, it is prudent to keep individual trades to a maximum of 1% of the trading account. This is a simple way to ensure that only high probability trades are entered into and has the added benefit of absorbing losses along the way without jeopardising the trading account. Trading the Dollar Index (DXY) is a valuable skill as it’s one of the most popular currency indexes worldwide. In this guide we explore the best tips and strategies for using the dollar index to trade forex, including an overview of the Dollar Smile Theory and Dollar Index trading hours. Any information contained in this site’s articles is based on the authors’ personal opinion.
Knowing this tendency, you can use this peculiar nature of the USD to your advantage and utilize the US Dollar Index to plan your long-term trades. Cristian Cochintu writes about trading and investing for CAPEX.com. Cristian has more than 15 years of brokerage, freelance, and in-house experience writing for financial institutions and coaching financial writers.
U.S. stocks end lower after Fed leaves interest rates unchanged, signals another rise possible
As a stronger currency can reduce demand for exports to other countries that pay for the goods with relatively weaker currencies, some governments pursue policies to keep down their nation’s currency value. Conversely, countries that import heavily favor a stronger currency to reduce the foreign exchange cost of paying for those imports. CFD trading is leveraged, which means you can gain exposure to a large position without having to commit the full cost at the outset.
How to use the US Dollar index in Forex trading?
Buying 100 shares of UUP means the trader expects the dollar to outperform the six constituent currencies. The dollar index can be used as an analytical tool for making forecasts with major pairs – EURUSD, GBPUSD, USDCHF, AUDUSD, USDCAD, USDJPY – and more exotic pairs with USD. If the interest rate rises, then, other things being equal, the yield of American Treasuries increases. Here, other conditions mean the market value of the bonds themselves — they could partially “adjust” in advance to future rate changes and adjust the yield. For understanding, let’s imagine an example that there are 1000 units of USD and 10,000 units of EUR. Under other conditions, it means that the weakening of the dollar does not occur against the background of an even greater weakening of other currencies.
The dollar index was first created by the Federal Reserve in 1973 to track the value of the dollar after the collapse of the Bretton Woods Agreement and the abandoning of the gold standard. That allowed the value of the dollar to float freely after being fixed at $35 per ounce of gold under the Bretton Woods Agreement. Investors buy into the Dollar once more, causing an increase in the value of the US Dollar. It is a geometric average, rather than an arithmetical average because each currency is multiplied by its respective percentage weight. The greenback posts five winning days in a row, boosted by possible inflation resurgence.Another day, another dollar gain. The greenback posts five winning days in a row, boosted by possible inflation resurgence.
The calculation takes the midpoint prices between the bid and offers for each currency. The prices for the DXY futures contracts are set by the market and reflect differentials in interest rates between the US dollar and the component currencies. The value of the DXY Index is calculated in real-time approximately every 15 seconds based on spot prices of the constituent currencies.
The index has gained its popularity among FX traders as a gauge of the value of the dollar against other currencies, helping traders to analyze more currency pairs using only one tool. Due to the high volumes of trading, trading gold futures strategy the spreads or commissions for the DXY can be competitive. The US Dollar Index (DXY) measures the value of the dollar against a basket of six major currencies, based on the exchange rates of these currencies.
You agree that LearnFX is not responsible for any losses or damages you may incur as a result of any action you may take regarding the information contained on this website. The regulated signals offered by this website are provided by a third-party service provider and you understand that any losses you may experience from using these signals are entirely at your own risk and liability. The global economic situation today largely depends on the state of the pips trading American economy. The US dollar index is one of the important indicators that can be used for trading and analysis. After March 2020, the weakening of the dollar was highly predicted due to a sharp increase in the money supply in the United States. The value of the US Dollar Index fell in 2020 after the initial flight to safety, as the US Federal Reserve policy to reduce interest rates to record lows and stimulate investment reduced the value of the dollar.
The exception is that the attractiveness of the economy is characterized not only by the interest rate. The more dollars are printed, the weaker their strength, all other things being equal. The weakening of the dollar means a decline in DXY, that is, a change, for example, from 92.0 to 89.0.
What influences the value of the US Dollar Index (DXY)?
The index climbed from the record low of 70.70 in March 2008 prior to the crisis to 88.58 by February 2009. As a global currency benchmark, DXY trading hours run 21 hours a day Sunday – Friday on the ICE platform, with the hours depending on the time zone. Dollar Index in 1985, ICE compiles, maintains, determines, and weights the components of the U.S. However, if you think that the dollar is likely to decline in 2010 the second ETF is UDN which invests against the dollar.