The US dollar has been the anchor currency of the international financial systems for decades. It is the currency of the largest economy with the most liquid financial market of the world and therefore there is no way around it. The US Dollar Index is an easy way to observe the development of the US dollar compared to the most important foreign currencies. In this article we talk about the calculation, the correlation to other asset-classes and how to use this knowledge in trading.
* The US Dollar Index (USDX) represents the value of the US dollar compared to a basket of six currencies. It was introduced in the year 1973 with a value of 100 and it is traded as a futures contract at the ICE futures US. The US Dollar Index represents a geometrically weighted average of the US currency compared to the following currencies:
* Japanese yen (JPY)
* British pound (GBP)
* Canadian dollar (CAD)
* Swedish crown (SEK)
* Swiss franc (CHF)
Up to 1998 the Deutsche Mark had been the largest of the participants of the index (there were ten at that time) at almost 21 per cent. Since then the euro has been the heavy weight of the index with 57.6 per cent. The weighting of the individual currency pairs is fixed and was only adapted in 1999 in the course of the introduction of the euro.
The formula for the calculation of the US Dollar Index is as follows:
50.14348112 x ((EUR ^ 0,576) x (JPY ^ 0.136) x (GBP ^ 0.119) x (CAD ^ 0.091) x (SEK ^ 0.042) x (CHF ^ 0.036)).
The volume-weighted US Dollar Index – also called “Broad Index” – is an alternative and accurate index, but it is not tradable. The Federal Reserve has calculated it since 1988. Here as well the US currency is compared to a (considerably larger) basket of goods. But the weighting of the currencies depends on the size of the particular volume of import and export. Therefore the Chinese yuan, which is not represented in the US Dollar Index, is the heavy weight beside the euro. However both indices show a similar development.
During the first quarter, the average U.S. Dollar Index level was more than 10% below the year-ago quarter. The dollar index may consolidate in a range of 87.25-92.10 over the next three months before seeking its next direction. A break below 87.25 could open the way towards 84.58. However, this target will only be confirmed when the index slides further below 87.259, the 50 percent retracement of the uptrend from the March 2008 low of 70.698 to 103.82.
Expected trading range is for 2018 between $78.60 support and $95.80 resistance.
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