As part of the agreement, participating countries settled their balances in U.S. dollars (which was used as the reserve currency), while the USD was fully convertible to gold at a rate of $35/ounce. The U.S. dollar index (USDX) is a measure of the value of the U.S. dollar relative to a basket of foreign currencies. Federal Reserve in 1973 after the dissolution of the Bretton Woods Agreement. It is now maintained by ICE Data Indices, a subsidiary of the Intercontinental Exchange (ICE). A monetary policy designed to stimulate an economy drives currency values, as for example, a country reducing interest rates or increasing money supply also reduces the attractiveness of its currency for foreign investors.
The US Dollar Index – known as USDX, DXY, DX and USD Index – is a measure of the value of the United States Dollar (USD) against a weighted basket of currencies used by US trade partners. The index will rise if the Dollar strengthens against these currencies and fall if it weakens. Keep reading to learn more on the US Dollar Index, how it is calculated, and what affects it price.
Traders can also use leveraged currency ETFs to bet against weakening international currencies. The ProShares UltraShort Euro (EUO) is designed to generate daily returns equal to double the inverse of the daily performance of the euro versus the U.S. dollar. Tech stocks have the largest overall exposure to international markets of any S&P 500 market sector, with overseas revenue representing 59% of total sales, according to Goldman. Semiconductor company Qualcomm (QCOM) generates nearly all—96%—of its revenue internationally, while Facebook parent Meta Platforms (META) and Google parent Alphabet (GOOGL) generate more than half of their revenue overseas. “A combination of higher inflation, the Fed’s aggressive tightening campaign and a global search for yield have all contributed to the strong dollar,” Lynch says. The dollar index tracks the relative value of the U.S. dollar against a basket of important world currencies.
- ICE offers dollar index futures for trading 21 hours a day on their platform.
- As a global currency benchmark, DXY trading hours run 21 hours a day Sunday – Friday on the ICE platform, with the hours depending on the time zone.
- Using CFDs for DXY trading allows you to trade the index in both directions; you can hold a long or short position, depending on whether you expect the price of an asset to rise or fall.
- Plan your technical analysis of the US Dollar Index by tracking its price in the chart and keep up with the latest market movements with news, advice pieces, and the dollar index forecast.
Conversely, countries that import heavily favour a stronger currency to reduce the foreign exchange cost of paying for those imports. The value of the DXY is driven by demand and supply of the US dollar, as well as the component currencies in the index. Currency demand is affected by monetary and trade policy as well as economic growth, inflation, geopolitical events and broad financial market sentiment. In addition to futures and options contracts, one of the easiest and most popular ways to trade the DXY is with contracts for difference, or CFDs.
How to trade DXY CFDs
The value of the US Dollar Index fell in 2020 after the initial flight to safety, as the US Federal Reserve policy to reduce interest rates to record lows and stimulate investment reduced the value of the dollar. At the same time, Russia’s invasion of Ukraine has created economic uncertainty around the world, particularly in the European energy market. Because the U.S. dollar is the world’s reserve currency and is generally considered a safe haven during periods of economic instability, investors have also been piling into the dollar for safety and security. A strong how to start a mortgage brokerage in 2023 dollar means other global currencies have been relatively weak, which Lynch says exacerbates inflationary pressures and financial market volatility. There is some debate in the currency markets that the US Dollar Index should be reformulated to include currencies from emerging markets that have become larger US trading partners, such as China and Mexico. As a stronger currency can reduce demand for exports to other countries that pay for the goods with relatively weaker currencies, some governments pursue policies to keep down their nation’s currency value.
An overvaluation of the USD led to concerns over the exchange rates and their link to the way in which gold was priced. President Richard Nixon decided to temporarily suspend the gold standard, at which point other countries were able to choose any exchange agreement other than the price of gold. In 1973, many foreign governments chose to let their currency rates float, putting an end to the agreement. The index started in 1973 with a base of 100, and values since then are relative to this base. It was established shortly after the Bretton Woods Agreement was dissolved.
Similarly, if the index is currently 80, falling 20 from its initial value, that implies that it has depreciated 20%. The appreciation and depreciation results are a factor of the time period in question. The euro is, by far, the largest component of the index, making up 57.6% of the basket.
What Currencies Are in the USDX Basket?
UUP has more than $2 billion in assets under management and is extremely liquid, averaging more than 4.1 million shares of daily trading volume. Investors also use the dollar index as a litmus test for U.S. economic performance, particularly when it comes to imports and exports. The more goods the U.S. exports, the more international demand there is for U.S. dollars to purchase those goods. The U.S. Dollar Index is a market index benchmark used to measure the value of the U.S. dollar relative to other widely-traded international currencies. However, such a strong Dollar caused problems for US exporters, who found that their goods were no longer as competitive internationally. As a result, the US government took action to make the currency more competitive with five countries agreeing to manipulate the Dollar in the forex markets as part of the ‘Plaza Accord’.
The American dollar is highly liquid and responds to global market trends as well as what is happening in the US economy, providing great opportunities for traders. Moreover, investors can use the US Dollar Index to hedge their portfolios against the risk of a move in the value of the US dollar. Leveraged trading in foreign currency or off-exchange products on margin carries significant risk and may not be suitable for all investors. We advise you to carefully consider whether trading is appropriate for you based on your personal circumstances. It is not a solicitation or a recommendation to trade derivatives contracts or securities and should not be construed or interpreted as financial advice.
Any examples given are provided for illustrative purposes only and no representation is being made that any person will, or is likely to, achieve profits or losses similar to those examples. DailyFX Limited is not responsible for any trading decisions taken by persons not intended to view this material. The value of the DXY Index is calculated in real-time approximately every 15 seconds based on spot prices of the constituent currencies. The calculation takes the midpoint prices between the bid and offer for each currency. The prices for the DXY futures contracts are set by the market and reflect differentials in interest rates between the US dollar and the component currencies.
What is the USD Index?
The USDX is based on a basket of six currencies with different weightings (see above). The index calculation is simply the weighted average of the U.S. dollar exchange rates against these currencies, normalized by an indexing factor (which is ~50.1435). The U.S. dollar index allows traders to monitor the value of the USD compared to a basket of select currencies in a single transaction. It also allows them to hedge their bets against any risks with respect to the dollar. The index is affected by macroeconomic factors, including inflation/deflation in the dollar and foreign currencies included in the comparable basket, as well as recessions and economic growth in those countries.
Goldman Sachs estimates S&P 500 companies generate about 29% of their total revenue from outside the U.S. Not surprisingly, analysts have tamped down S&P 500 revenue growth estimates for 2023. According to Yardeni Research, the consensus estimate for the fourth quarter is +9%. “Foreign currency conversion can have a positive or negative effect on operating results. Now, the dollar index is very elevated and will ultimately serve as a headwind for overseas business of U.S. corporations,” Bevins says. Since 1985, the dollar index has been calculated and maintained by Intercontinental Exchange (ICE).
The Euro and Pound are the base currency for the two others, with these given a negative value. Wayne Duggan has a decade of experience covering breaking market news and providing analysis and commentary related to popular stocks. https://www.topforexnews.org/books/gottwals-books-walls-of-books/ News & World Report and a regular contributor for Forbes Advisor and USA Today. The Fed’s top priority in 2022 has been bringing down inflation from multi-decade highs, and its best weapon has been raising interest rates.
For example, it rose as the current account generated a surplus in the 1990s, fell as US debt levels increased in the 2000s, and rallied as investors flocked to the relative safety of the Dollar during the Great Recession. The USDX allows traders and investors to monitor the purchasing power of the U.S. dollar relative to the six currencies included in the index’s basket. In the coming years, it is likely currencies will be replaced as the index strives to represent major U.S. trading partners.
The US Dollar Index, also known as DXY, is used by traders seeking a measure of the value of USD against a basket of currencies used by US trade partners. The index will rise if the Dollar strengthens against these currencies and will fall if the Dollar weakens against these currencies. Plan your technical https://www.day-trading.info/bond-yields-and-the-price-of-bonds/ analysis of the US Dollar Index by tracking its price in the chart and keep up with the latest market movements with news, advice pieces, and the dollar index forecast. DXY trading allows investors to gain exposure to the foreign exchange markets based on the US dollar, the global reserve currency.