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What is the US Dollar Index DXY and why do investors follow it?

What is the US Dollar Index? DXY is a measure of the strength of the US dollar against a basket of major currencies consisting f . six coins, The major currencies are the currencies of the most important trading partners of the United States of America.

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When analysts talk about the rise or fall of the dollar, They refer to the US dollar index. This indicator is an important analytical tool for traders in almost every market. It is actually a forward contract. This means if you have a futures trading account. You can trade with this tool, It also trades oil and gold prices or currency futures contracts. But, there are much easier ways to profit from fluctuations in the dollar. Then you create a futures account.

The DXY is made up of six foreign currencies. Which:

  • Euro- (EUR)
  • Yen- (JPY)
  • British pound- (GBP)
  • Canadian Dollar- (CAD)
  • Swedish Krona- (SEK)
  • Swiss Franc- (CHF)

If you are a stock trader and you are familiar with all the available indicators. Like the Dow Jones Industrial Average (DJIA). And the Nasdaq index, Russell 2000, Standard & Poor’s 500 S&P, Wilshire 5000, Nimbus 2001, and also the US currency, the US dollar, has an index that measures its performance against a basket of currencies. This indicator is known as the USDX or DOLLAR INDEX or the Dollar Index. DXY US Dollar Index Dollar Index It is a geometric set that gives the weighted average of a basket of foreign currencies against the dollar.

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US dollar index

The index compares the US dollar against a basket of other global currencies. This basket represents the majority of the world’s largest floating currencies on a weighted rate basis. Some of the currencies in the index are the euro, Japanese yen, British pound, Canadian dollar, Swedish krona, and Swiss franc. Each of these coins has a weight within the scale, With the largest weight being the euro.

The importance of the US dollar index DXY

The US Dollar Index helps investors monitor the value and strength of the dollar against other currencies through a single transaction or reading. This allows them to hedge against any risks related to their dollar investments.

Now I invite you to think about the importance of the US dollar. Since it consists of 6 currencies, how many countries are included in that indicator???

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If the answer is “6” then the answer is wrong and if the answer is “24” then you are right!

There are a total of 19 EU member states that deal officially in the euro currency in addition to the other five countries (Japan, Britain, Canada, Sweden, Switzerland) owners of competing currencies.

Obviously, 24 countries make up a small part of the world but many other currencies follow the US dollar index closely. This makes USDX a good tool for measuring the US dollar as a global power.

How is the DXY dollar index calculated?

The dollar index is calculated by determining the exchange rates of the six major currencies, In this measure, the euro holds the largest percentage of the dollar index, which is 58 %، Next is the Japanese yen

by 14 %.

Historical overview of the US dollar index

The US dollar fell significantly against other global currencies in 2010 and the pattern is likely to continue in 2011. Spending deficits, war and the Fed flooding the market with dollars to help the banking market could cause inflation to accelerate and the currency to continue to weaken. Inflation can be very bad for savers and investors who own stocks or other dollar-denominated assets. But, It’s easy to turn this problem into an opportunity over the next year.

The index was established in 1973 with an initial value of 100. This means that if USDX is below 100, The US dollar has lost relative value compared to its value in 1973, Even if it is over 100. The US dollar is stronger than it was in 1973.

DXY US Dollar Index readings

  • The index reached its highest reading in 1985 as it surpassed the 129 reading against the basket of major currencies.
  • It was the lowest reading the index fell to, as it reached 70.80 against the other currencies.
  • Last year the reading remained in a narrow range from 95 to 99.
  • Its highest reading in 2019 was 99.33, While the lowest reading it fell to was 94.63.

Notes about the value of the indicator

If the index reading rises, it means that the US dollar is gaining value against other currencies.

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If the value of the indicator becomes 120 points, This means that the dollar has risen by 20% against other currencies during a certain period of time.

Similarly, if the index reading becomes 80, this means that the dollar has fallen by 20% against the rest of the currencies.

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