What Is the U S. Dollar Index USDX and How to Trade It

what is dxy

The index climbed from the record low of 70.70 in March 2008 prior to the crisis to 88.58 by February 2009. Since then, the US Dollar Index has tracked economic performance and liquidity flows. 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. Milan Cutkovic has over eight years of experience in trading and market analysis across forex, indices, commodities, and stocks. He was one of the first traders accepted into the Axi Select programme which identifies highly talented traders and assists them with professional development. The US Dollar Index is a measure of the value of the United States Dollar relative to a basket of foreign currencies.

what is dxy

It can be used by forex traders looking for a tool that gauges whether it’s time to buy or sell currencies based on what’s happening with other world markets. The prices of the DX futures contracts are set by the market, and reflect interest rate differentials between the respective currencies and the U.S. dollar. Central banks and governments hold US dollars as the primary exchange asset of their foreign exchange coinmama exchange review reserves. 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.

If you’ve traded stocks, you’re probably familiar with all the indices available such as the Dow Jones Industrial Average (DJIA), NASDAQ Composite Index, Russell 2000, S&P 500, Wilshire 5000, and the Nimbus 2001. Commodity prices tend to fall (at least nominally) as the Dollar increases in value – and vice versa. Currency pairs, on the other hand, generally move in the same direction as the Dollar Index if USD is the base currency, and opposite direction if it is the quote currency – though these ‘rules’ do not always hold true. The US Dollar Index was started by the Federal Reserve in 1973 and has been managed by ICE Futures US since 1985. It compares the value of the US Dollar against six currencies used by major US trade partners – the Euro (EUR), Japanese Yen (JPY), Pound Sterling (GBP), Canadian Dollar (CAD), Swedish Krona (SEK) and Swiss Franc (CHF). AxiTrader Limited is a member of The Financial Commission, an international organization engaged in the resolution of disputes within the financial services industry in the Forex market.

Markets see tech-stock selling ahead of inflation data

CFDs give you the opportunity to profit from price movements in either direction – not only when the value goes up. The following chart shows the U.S. dollar index value from the elimination of the gold standard in January 1971 to January 2022. Because the USDX is so heavily influenced by the euro, traders have looked for a more “balanced” dollar index. The ICE Exchange symbol for the value of the underlying Dollar Index (sometimes called the cash or spot index) is also DX (without a month or year code), although different data providers may use different symbols.

The Index was adjusted once when the euro was introduced as the common currency for the European Union (EU) bloc of countries. This makes the USDX a pretty good tool for measuring the U.S. dollar’s global strength. It’s obvious that 24 countries make up a small portion of the world but many other currencies follow the U.S.

  1. The index is also available indirectly as part of exchange-traded funds (ETFs) or mutual funds.
  2. The dollar index measures the US currency against other reserve currencies.
  3. The value of shares and ETFs bought through a share dealing account can fall as well as rise, which could mean getting back less than you originally put in.
  4. Euros and pounds are the only two currencies where the U.S. dollar is the base currency because they’re quoted in terms of the dollar.
  5. Leveraged trading in foreign currency or off-exchange products on margin carries significant risk and may not be suitable for all investors.

Investors can use the index to hedge general currency moves or speculate. The index is also available indirectly as part of exchange-traded funds (ETFs) or mutual funds. The USDX uses a fixed weighting scheme based on exchange rates in 1973 that heavily weights the euro. As a result, expect to see big moves in the fund in response to euro movements. Euros and pounds are the only two currencies where the U.S. dollar is the base currency because they’re quoted in terms of the dollar. ICE operates 13 regulated exchanges, including ICE futures and OTC exchanges in the US, Canada, Europe, and Singapore.

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Dollar Index in 1985, ICE compiles, maintains, determines, and weights the components of the U.S. The collapse of the system began in 1971 as the United States suffered from stagflation. President Nixon decided to unpeg the value of the dollar from gold, thus ending the Bretton Woods agreement. Continue reading to find out exactly how the US Dollar Index is calculated, how you can trade this index, and why it is so important for forex traders to monitor. The value of shares and ETFs bought through a share dealing account can fall as well as rise, which could mean getting back less than you originally put in. Prior to the introduction of the euro in 1999, the US Dollar Index included the West German mark, the French franc, the Italian lira, the Dutch guilder and the Belgian franc.

what is dxy

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’. If you are using technical analysis in your trading, you can analyse the US Dollar Index in pretty much the same way you would do any for any type of currency pair or stock index. As the weekly chart illustrates, the index moved from an eighteen-year high to its lowest level since February 2018 as it fell steadily through 2020 and into early 2021. The most recent low was at 89.165, only 1.015 above the early 2018 bottom, which was the lowest level since late 2014. For instance, the Invesco DB U.S. Dollar Index Bullish Fund (UUP) is an ETF that tracks the changes in value of the US dollar via USDX future contracts. The Wisdom Tree Bloomberg U.S. Dollar Bullish Fund (USDU) is an actively-managed ETF that goes long the U.S. dollar against a basket of developed and emerging market currencies.

U.S. Dollar Index (DXY)

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. The DXY Dollar Index was created by the US Federal Reserve in 1973, after the Bretton Woods system of payments based on the dollar came to an end. Countries decided to let their currencies float freely rather than being pegged at fixed rates to the US dollar, after the US government suspended the gold standard. The system established rules for trading between the US, Canada, Western Europe, Australia and Japan after the Second World War.

Erika Rasure is globally-recognized as a leading consumer economics subject matter expert, researcher, and educator. She is a financial therapist and transformational coach, with a special interest in helping women learn how to invest. It’s very similar to how the stock indices work in that it provides a general indication of the value of a basket of securities. Check fusion markets review out the latest USD Index price with our chart and follow the latest news and analysis from our DailyFX experts. The below chart shows some of the major events that affected the USDX price since 2005. Here we can see that USD is the base currency in four of the six currency pairs included, with these given a positive value for the purposes of the calculation.

The US Dollar Index can be traded using futures and options or, where permitted, spread betting and CFD trading can also be used to speculate on whether the USDX will go up or down in price. Read more on how to trade thinkmarkets review US Dollar Index for technical strategies and tips. Supply and demand for currencies is heavily influenced by the monetary policies – particularly the interest rates – set by the central bank in each country.

DXY trading allows investors to gain exposure to the foreign exchange markets based on the US dollar, the global reserve currency. 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. The pricing benchmark for most commodities is the US dollar because of its liquidity, stability, and role as the leading reserve currency. Local production costs and consumer prices may in various currencies, but wholesale supplies use the US dollar as the means of exchange.

DXY (US Dollar Index)

However, if a trader plans to use the US Dollar Index to bet on the direction of the Dollar, they must always be mindful of the basket and the weightings. We introduce people to the world of trading currencies, both fiat and crypto, through our non-drowsy educational content and tools. We’re also a community of traders that support each other on our daily trading journey. Now that we know what the basket of currencies is composed of, let’s get back to that “geometric weighted average” part. However, such a strong Dollar caused problems for US exporters, who found that their goods were no longer as competitive internationally.