Understanding The US Dollar Index (USDX)

USDX is the US Dollar index that is used as an indicator by traders who wish to deal in gold currencies, futures, commodities and bonds. It’s one of several indicators which help Forex traders to assess the relative strength or weakness of the US dollar against another currency.

The US Dollar Index was introduced in 1973 and given a value of 100. This hasn’t changed since then so the USDX value that we use today to compare the strength of the US dollar remains the same.

Weighted at 100

If the value of the index is more than 100, this would mean that the US dollar is stronger than what it was in 1973. The reverse is also true; if the value is lower than 100, the USD is weaker than what it was in 1973.

It is easier to measure the extent of this strength or weakness.

If the index value is 75, the USD is weaker by 25 percent than in 1973. If the value is 140, the USD is 40 percent stronger.

It isn’t so easy to calculate the exact value of the USDX as it is in all respects an index that was created for one purpose—to compare the USD to various other global currencies.

The leading currencies used for this comparison are the euro, the Canadian dollar, the Japanese yen, the Swedish krona and the Swiss franc. The comparison is a weighted one with the maximum weight-age being given to the euro.

There are some Forex traders that consider the USD/EUR as being comparable to that of the USDX.

Using the USDX

Who uses the USDX? It is mostly traders of gold, commodities, bonds and foreign currencies that look to the USDX as a way to predict the markets more efficiently.

Those who trade in the USDX futures markets are interested in knowing the trends of the USDX lines. Also, those who trade in the gold markets understand that the USDX is heavily connected with falling gold prices and that knowing the direction in which the USDX is going can help predict gold rates as well.

When it comes to bond traders, a global crisis will increase the demand for USD as traders across the world try to secure their investments. This demand causes a drop in bond yield prices and therefore affects bond traders too.

In general, the US Dollar Index is beneficial in understanding the relative strengths of the U.S. greenback.

Together with some other indirect indicators such as simple MA’s, forex traders can get an edge on what is really happening in the forex markets.

This is a guest post written by Michael Coren.

Michael Coren is a contributing editor for DailyForex and a freelance writer for several financial publications.