USING THE US DOLLAR INDEX


The US dollar is considered the global currency because it is the recognized currency for most international trades, which is why most countries keep the dollar in their reserves. When it comes to the Forex market, the US dollar has an even greater role, accounting for more than 80% of all Forex pairs being traded. Given that the Forex market is the largest market in the world, it is obvious that the US dollar plays a very significant role in many aspects of currency exchange.

The US dollar index (DXY), dixie, was created in 1973 as a result to compare how the US dollar stacks up to other currencies which were major trading partners of the US at the time. Back then, the DXY compared the US dollar to 10 other currencies, referred to as the basket of currencies. Later, the number was reduced to 6 after the formation of the Euro in 1999 doing away with currencies like the German mark.The proportion of each currency in the basket through a geometric meanto ensure every currency was equally represented.

To date, the DXY is still made primarily of these 6 currencies, but there have been calls to appeal the basket currencies.Emerging economies like Brazil, China, Mexico and South Korea have become greater trading partner, yet they are not represented. In the meantime, several variants of the DXY have arisen to cover the deficit of these excluded currencies, and they too can be traded in exchanges.

What is the rol​e of the DXY?

Now that we’re done with the history and basics of the DXY, it’s time to consider how it can be of use to traders and investors. First of all, the DXY is an index just like the Dow Jones and the S&P 500, so it can be traded on an exchange as a futures contract or an option. However, only theNew York Board of Trade offers futures and options for the dixie.

Other currency indices are also traded there, but the dixie remains the most popular. A trader or investor can still trade the DXY on other exchanges, but only in the form of an ETF (exchange-traded fund) or through a mutual fund.

At its inception in 1973, the value of the DXY was 100, and this acts as the baseline for the strength of the DXY. Thus, if the value rises to, say, 150, the DXY is said to have appreciated by 50%, and if it drops to 50, it is said to have depreciated by 50%. Of course, the value of the DXY rarely shifts so drastically except it extreme cases like the 2008 global recession when it dropped to the all-time low of 70.698.

The DXY is available for trading only when the US trading session is open, and it is not a 24-hour system like the Forex market. You can start trading the DXY starting 6pm EST (Eastern Standard Time) on Sunday until 5pm EST on Monday. From Tuesday to Friday, the DXY is only tradable between 8am to 5pm EST. The value of the DXY is then updated every 15 seconds as the positions are weighed.

A standard contract of the DXY is $1,000 times the value of the index at that time, and the tick size is worth $5. Thus, if the value of the DXY is, say, 110, you would need $110,000 to purchase a single futures contract. Generally, the contracts have an expiration cycle of 3 months, but you can always trade any open contracts through an exchange. The size of the contract required is quite large, and it restricts many retail forex traders and individuals from participating in the DXY, but that doesn’t mean it can’t be of use.

Importance to Forex traders

Even though it remains largely inaccessible, there is no group of people who rely more on the DXY than Forex traders because, as we saw before, the US dollar accounts for more than 80% of all Forex transactions. By analysing the performance of the DXY, a trader can be more informed about the strength of the US dollar and place their trades accordingly.

For example, if the value of the DXY is higher that it was on the previous trading day, it is an indication that the strength of the US dollar is greater. Accordingly, traders should look for opportunities to buy the US dollar and go long on USD pairs that day and vice versa.

Besides acting as a guideline on the strength of the US dollar, some Forex brokers may offer the index within their trading platforms, allowing the trader to participate in trading the DXY. The advantage to this is that the broker can provide leverage, allowing a retail trader to participate in the DXY trade even though they don’t have the required capital.

This could provide another opportunity to a Forex trader to diversify their portfolio and also to hedge their trades and minimize risk. Besides, the DXY index is fairly predictable and doesn’t have as much of a risk as trading currency pairs, and this can be an advantage to the long-term investor.

To learn more about the DXY and how to trade, this website with top Forex brokers rating can be a great resource.