The US dollar index (USDX) is a measure of US dollar value relative to a basket of foreign currencies. USDX was founded by the US Federal Reserve in 1973 after the dissolution of the Bretton Woods agreement. Now managed by the ICE Data Index, a subsidiary of the Intercontinental Exchange (ICE).
The six currencies included in the USDX are often referred to as the most significant trading partners in America, but the index was only updated once: in 1999 when Euro replaced the German signs, France Franc, Italian Lira, Dutch Guilder, and Belgium Franc.
As a result, the index does not accurately reflect the current US trade.
Understand the US Dollar Index (USDX)
The current index is calculated by taking into account the exchange rates of six foreign currencies, which include Euro (EUR), Japanese Yen (JPY), Canadian Dollar (CAD), British Pound (GBP), Sweden Krona (Sek), and Swiss Franc (CHF) .
Euro, so far, is the largest component of the index, forming 57.6% of the basket. The weight of the remaining currency in the index is JPY (13.6%), GBP (11.9%), CAD (9.1%), Sek (4.2%), and CHF (3.6%).
The index began in 1973 with a 100 base, and the value since then relative to this base. It was established shortly after the Bretton Woods agreement was dissolved. As part of the agreement, the countries participating in completing their balances in the US dollar (which are used as reserve currencies), while USD can be fully converted into gold at the $ 35/ounce rate.
USD’s re -assessment causes concern for their exchange rates and relationships in a way where gold is valued. President Richard Nixon decided to temporarily suspend gold standards, where other countries could choose exchange agreements other than gold prices. In 1973, many foreign governments chose to let their currency rates float, ending the agreement.
History of the US Dollar Index (USDX)
The US dollar index has increased and dropped sharply throughout its history. It reached the highest of all time in 1984 in nearly 165. The lowest of almost 70 in 2007. In April 2022, the index was around 100. Over the past six years, the US dollar index has relatively ranging from 90 and 100.
This index is influenced by macroeconomic factors, including inflation/deflation in dollars and foreign currencies included in comparable baskets, as well as recession and economic growth in these countries.
The contents of the currency basket were only changed once since the index began when the Euro replaced many previous European currencies in the index in 1999, such as the German predecessor, Deutschemark.
In the coming years, the possibility of the currency will be replaced because the index is trying to represent the main US trading partner. It is possible that in the future that currencies such as Yuan China (CNY) and Mexican Peso (MXN) will replace other currencies in the index because China and Mexico are the main trading partners with the U.S.
Interpreting and trading the US Dollar Index (USDX)
Index value 120 shows that the US dollar has appreciated 20% versus a currency basket over the period of time concerned. Simply put, if USDX rises, it means the US dollar gets strength or value when compared to other currencies.
Likewise, if the current index is 80, it falls 20 of its initial value, which implies that it has depreciated 20%. The results of appreciation and depreciation are factors of the questioning period.
The US dollar index allows traders to monitor the value of USD compared to a certain currency basket in one transaction. This also allows them to protect their bets against any risk in connection with the dollar. It is possible to combine the futures strategy or option on USDX.
This financial product is currently traded on the New York Trade Council. Investors can use indexes to protect the value of public currencies or speculate. This index is also available indirectly as part of the funds traded on the Exchange (ETF) or mutual funds.