What Is The Dollar Index and Why Do Traders Use It?
Market Analysis - | 20 Sep 2019
In this article, we will have a look at the Dollar Index, its components and why traders use it.
USDX / DXY / USDINDEX.fs (AxiTrader MT4)
What is it?
A measure of the value of the US Dollar relative to a basket of six foreign currencies.
Why was it created?
It was created shortly after the Bretton Woods System collapsed, and its intention was to track the Dollar´s performance compared to the currencies of the main US trading partners. Since the 1980s, it has become tradable as a futures contract, and speculators have been using it as a way to speculate on the movement of the US Dollar against a basket of other major currencies.
How is it calculated?
The Dollar Index is a weighted geometric mean of the Dollar´s value compared to:
- Euro (0.576)
- Japanese Yen (0.136)
- Pound Sterling (0.119)
- Canadian Dollar (0.091)
- Swedish Krona (0.042)
- Swiss Franc (0.036)
Is the Dollar Index adjusted from time to time?
Adjustments are done rarely. The last major adjustment was done when the Euro was introduced. This is one of the reasons why the Index has been criticized in the past. The list of major US trading partners has changed significantly over the past four decades, and it is indeed strange to see the Swiss Franc and Swedish Krona represented and not the South Korean Won, Brazilian Real or Chinese Yuan.
What is the underlying instrument?
The USINDEX.fs is based on the US Dollar Index futures contract, which is being traded on the ICE. The size of one US Dollar Index future is 1000 times the index value. Therefore, if we take the current price of 98.50, one contract would be worth $98,500.
Can I trade the Dollar Index with AxiTrader?
Yes. You will find the “USDINDEX.fs” symbol under “Indices Futures” in MetaTrader 4.
What are the trading hours?
You may trade the Dollar Index Monday to Friday from 03:00 to 23:58 (MT4 Server Time). The smallest possible trade size is 0.01 lots.
Analyzing the Dollar Index
If you are using technical analysis in your trading, you can analyze the Dollar Index in pretty much the same way as you would do an ordinary currency pair. Looking at the Daily chart, the DXY has been trading within an uptrend channel for quite some time, but lost some of its momentum recently. Traders will now be closely looking at the 21 DMA (green line) and the lower channel trendline. A clear breakout below that line could signal a potential trend reversal and pave the way for a retracement towards the 200 DMA (blue line).
The information is not to be construed as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product, or instrument; or to participate in any trading strategy. Readers should seek their own advice. Reproduction or redistribution of this information is not permitted.
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