Did you know about the U.S Dollar Index?
We will talk a bit about an index that has existed for a long time, yet many traders do not know or use it. With this, we do not mean that it is 100% necessary, but it is good to consider certain situations. This post aims to give a theoretical development and then the technical vision of the graph in different temporalities.
🔸First of all, let's talk a little about what this index is:
The U.S. dollar index (USDX) is a measure of the value of the U.S. dollar relative to the value of a basket of currencies of the majority of the U.S.'s most significant trading partners. This index is similar to other trade-weighted indexes, which also use the exchange rates from the same major currencies.
The index is currently calculated by factoring in the exchange rates of six major world currencies, which include the Euro (EUR), Japanese yen (JPY), Canadian dollar (CAD), British pound (GBP), Swedish krona (SEK), and Swiss franc (CHF). The EUR is, by far, the largest component of the index, making up almost 58 percent (officially 57.6%) of the basket. The weights of the rest of the currencies in the index are JPY (13.6%), GBP (11.9%), CAD (9.1%), SEK (4.2%), and CHF (3.6%).
🔸When was it created?
It started in March 1973, soon after the dismantling of the Bretton Woods system. At its start, the value of the U.S. Dollar Index was 100.000. It had since traded as high as 164.7200 in February 1985 and as low as 70.698 on March 16, 2008.
The make-up of the "basket" has been altered only once when the euro subsumed several European currencies at the start of 1999. Some commentators have said that the makeup of the "basket" is overdue for revision as China, Mexico, South Korea, and Brazil are major trading partners presently which are not part of the index, whereas Sweden and Switzerland are continuing as part of the index
🔸Why is it useful?
It’s an indication of the general performance of the US Dollar. This can be important not only in terms of technical analysis but fundamentally also. For example, movements in exchange rates of currencies impact the inflation rate and trade relationships of a county. Most policymakers, therefore, like to monitor the performance of their currency and take appropriate measures if/when needed.
The best way to see how strong or weak a particular currency is, is to use an index that shows the broad performance of that currency. The DXY is one such index, and for that matter, all currencies have an index that is monitored by the central bank and Government of that country.
Aside from the above, as the most important currency of the world, the US Dollar and its value can impact many other countries and the global economy. This is why the Dollar Index is the most important currency index and why so many versions of it have been created.
The USDX also has some known relationships with commodities like Gold and Oil. Generally, Dollar weakness is accompanied by rising commodity prices and vice versa.
🔸Now, let's go to the technical aspect of the chart:
In the monthly chart (published), we clearly see how the downtrend that was in force for more than 30 years was broken. This was a key event. The problem is that after this breakout, we did not see a continuation movement, and on the contrary, we have been on a consolidation process for more than six years.
We consider two potential scenarios that can happen based on the current movement. First, if we see a bullish break in the consolidation, it is very likely that we will see an upward momentum towards approximately 120.000, which is the closest supply zone that we see at this time.
For that to happen, we should see buying pressure, and that is not happening now. The price is close to the support zone and with a rather bearish behavior on the Weekly chart. We detail it below.
There was a breakout of the Ascending Trendline and its subsequent pullback, where it found supply again and resumed the fall. We are now close to the support zone.
Given this behavior and seeing the current bearish pressure, we believe that it is possible to see a breakout in that direction. Anyway, until that happens, we consider that it would not be safe to start a trade, as there is a possibility that the zone will not be broken.
If such a breakout happens, the next target is the support zone at 78.000-80.000.
🔸First of all, let's talk a little about what this index is:
The U.S. dollar index (USDX) is a measure of the value of the U.S. dollar relative to the value of a basket of currencies of the majority of the U.S.'s most significant trading partners. This index is similar to other trade-weighted indexes, which also use the exchange rates from the same major currencies.
The index is currently calculated by factoring in the exchange rates of six major world currencies, which include the Euro (EUR), Japanese yen (JPY), Canadian dollar (CAD), British pound (GBP), Swedish krona (SEK), and Swiss franc (CHF). The EUR is, by far, the largest component of the index, making up almost 58 percent (officially 57.6%) of the basket. The weights of the rest of the currencies in the index are JPY (13.6%), GBP (11.9%), CAD (9.1%), SEK (4.2%), and CHF (3.6%).
🔸When was it created?
It started in March 1973, soon after the dismantling of the Bretton Woods system. At its start, the value of the U.S. Dollar Index was 100.000. It had since traded as high as 164.7200 in February 1985 and as low as 70.698 on March 16, 2008.
The make-up of the "basket" has been altered only once when the euro subsumed several European currencies at the start of 1999. Some commentators have said that the makeup of the "basket" is overdue for revision as China, Mexico, South Korea, and Brazil are major trading partners presently which are not part of the index, whereas Sweden and Switzerland are continuing as part of the index
🔸Why is it useful?
It’s an indication of the general performance of the US Dollar. This can be important not only in terms of technical analysis but fundamentally also. For example, movements in exchange rates of currencies impact the inflation rate and trade relationships of a county. Most policymakers, therefore, like to monitor the performance of their currency and take appropriate measures if/when needed.
The best way to see how strong or weak a particular currency is, is to use an index that shows the broad performance of that currency. The DXY is one such index, and for that matter, all currencies have an index that is monitored by the central bank and Government of that country.
Aside from the above, as the most important currency of the world, the US Dollar and its value can impact many other countries and the global economy. This is why the Dollar Index is the most important currency index and why so many versions of it have been created.
The USDX also has some known relationships with commodities like Gold and Oil. Generally, Dollar weakness is accompanied by rising commodity prices and vice versa.
🔸Now, let's go to the technical aspect of the chart:
In the monthly chart (published), we clearly see how the downtrend that was in force for more than 30 years was broken. This was a key event. The problem is that after this breakout, we did not see a continuation movement, and on the contrary, we have been on a consolidation process for more than six years.
We consider two potential scenarios that can happen based on the current movement. First, if we see a bullish break in the consolidation, it is very likely that we will see an upward momentum towards approximately 120.000, which is the closest supply zone that we see at this time.
For that to happen, we should see buying pressure, and that is not happening now. The price is close to the support zone and with a rather bearish behavior on the Weekly chart. We detail it below.
There was a breakout of the Ascending Trendline and its subsequent pullback, where it found supply again and resumed the fall. We are now close to the support zone.
Given this behavior and seeing the current bearish pressure, we believe that it is possible to see a breakout in that direction. Anyway, until that happens, we consider that it would not be safe to start a trade, as there is a possibility that the zone will not be broken.
If such a breakout happens, the next target is the support zone at 78.000-80.000.
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