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What is the US dollar index? Why do I have to monitor the US dollar index? What does the US dollar index show? Is the US dollar index important? These are some of the questions a forex broker hears frequently.
Today we will discuss all the basics surrounding the US dollar index. Everything you will need to know about the US dollar index will be right here in this article.
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DXY/US DOLLAR INDEX
The US Dollar Index, also known as DXY, is used to measure the value of the US dollar against a basket of six world currencies – Euro, Swiss Franc, Japanese Yen, Canadian dollar, British pound, and Swedish Krona.
The index was established shortly after the Bretton Woods Agreement dissolved in 1973 with a base of 100, and values since then are relative to this base. The value of the index is a fair indication of the dollar’s value in global markets.
In other words, the value of the US dollar index shows how much the US dollar has risen or fallen relative to the starting point of the index back in 1973.
For instance, if the dollar is at 80%, it means it has fallen by 20% since March 1973. On the other hand, if the dollar reading is 120%, this means that the dollar has increased by 20%.
The U.S. dollar index is calculated via the following formula:
DXY = 50.14348112 x EURUSD ^-0.576 x USDJPY ^0.136 × GBPUSD ^-0.119 x USDCAD ^0.091 x USDSEK ^0.042 x USDCHF^0.036
Note that when the US dollar is not the base value in the currency cross, the value is negative.
You can trade the US dollar index just like an equity index. Instead of buying and selling several securities simultaneously, you’d only deal in one. In this case, rather than trading several US dollar pairs, you can trade one index that should rise and fall in line with the overall USD market sentiment.
If the DXY rises, then the US dollar has gained in strength versus the other currencies in the basket. It’s reasonable to assume that if the index is bullish, then overall confidence in USD is high and if you were to enter a buy trade, then you would profit.
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