The index of the dollar (USDX) is an important analytical tool for merchants in any market. The USDX is really a futures contract that means that, if you have a futures trading account could trade this instrument such as corn, oil, gold or currency futures contracts. However instead of trade the USDX most retail traders use it as a way of analyzing the relative strength or weakness of the US dollar in general.
The USDX compares the United States dollar (USD) against a basket of other currencies in the world. This basket represents the majority of largest free floating currencies, major in the world on an average basis weighted. The currencies that are included are the euro, yen, pound sterling, Canadian dollar, Swedish krona and Swiss franc. Each of these currencies are given a weight in the index with greater weight given the euro.
The euro is generally half of the total weight, including in the middle of the graph to the USDX and often will look like a chart of the USD/EUR futures contract. Flat forex traders will notice that the USDX is very similar to the inverse of the flat forex of EUR/USD pair. However, because the USDX includes 6 different currencies is a better measure of force USD to any pair of currency including the EUR/USD.
The USDX was set up in 1973 with an initial value of 100. This means that if the USDX is measured less than 100 USD has lost relative value compared to what it was worth in 1973, and if it is above 100 and us $ is stronger than in 1973. Currently the USDX is about 82, which means that it is weaker than its initial value of 18%. The dollar has not always been weaker than that in 1973, the USDX showed an improvement of 20% in value in the USD in 2001 and 2002.
The USDX is especially useful for traders of bonds, currency and gold markets. For example, a strong USD is usually related to the fall of the prices of gold, which means that gold traders are very interested in a jump out of the USDX despite may not be trade us $ directly. Similarly, the global crises often increase demand for the USD as investors seek a haven of uncertainty. This will boost the value of the USD up and bond yields will often drop. These are just two examples of how the USDX is a tool more inter-market that can be used to evaluate capital flows and the search for new business opportunities.
Graphics for the USDX in even-numbered pages of analysis in the forex markets learning website section but if you are interested in the USDX has two attractive alternatives for trade. First of all, you can open a futures account. There are futures and options on futures available in the USDX that trade on the Board of trade in New York.
Secondly can trade ETFs that track the same USDX. PowerShares offers two ETF alternatives to trade index. The first is UUP which invests in long in the USDX futures contracts, which means that you moving the same direction as the rate of the dollar. The second is UDN that invests in the final analysis the USDX futures contracts, which means that it will increase in value when the rate of the dollar weakens. If you are the dollar Bull could purchase UUP and if low the dollar could buy UDN.
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