Hey traders,
I share my analysis, signals and forecasts on Dollar Index occasionally. Quite often I receive questions from you asking me to explain what exactly that index means and why it is so important.
Dollar Index (DXY) is a measure of the value of the United States Dollar against a weighted basket of major currencies.
This basket consists of 6 following currencies:
🇪🇺Euro (EUR) - 57.6% share
🇯🇵Japanese yen (JPY) - 13.6% share
🇬🇧Pound sterling (GBP) - 11.9% share
🇨🇦Canadian dollar (CAD) - 9.1% share
🇸🇪Swedish krona (SEK) - 4.2% share
🇨🇭Swiss franc (CHF) - 3.6% share
The selection of the following basket of currencies and their weight is determined by the significance of a trading partnership between the countries.
The index value is calculated with the formula:
USDX = 50.14348112 × EURUSD ^ -0.576 × USDJPY ^ 0.136 × GBPUSD ^ -0.119 × USDCAD ^ 0.091 × USDSEK ^ 0.042 × USDCHF ^ 0.036
Take a look at a correlation coefficient between Dollar Index and EURUSD, most of the time it is close to -1. It implies a perfect negative relationship between two instruments.
While a correlation between Dollar Index and USDCHF is not that tight due to limited value of Swiss Franc in a calculation of the index.
The index was launched in 1973 and had an initial value of 100.
When the U.S.D is gaining strength against the above-mentioned currencies, the index is growing, while its weakness against them leads to a decline of the index value.
To conclude, the Dollar Index reflects a fair value of the Dollar and its dominance in global markets. Its analysis may help to make more accurate predictions of the future direction of the dollar related instruments.
Do you analyze DXY?
