October 15, 2013

Trading The Forex Market With The Dollar Index

Forex USDX

The US dollar index is a very important analytical tool for virtually all kinds of forex traders in any market. It is usually offered by brokers as a futures contract. However, many traders do not trade the USDX as an instrument. They simply use it to gauge the strength or weakness of the USD against other major pairs.

The USDX compares the US dollar USD against a plethora of many other world currencies.  The pool includes the major fee floating major currencies across the globe on the basis of a weighted average. The currencies that make up this pool include the EURO, YEN, British Pound, Canadian Dollar, Swedish Krona and the Swiss Francs. All of these are allotted different weight within the index, and the biggest weight is given to the Euro.

History of the USDX

The USDX was established in the year 1973; and at the time, its starting value was 100. This meant that if the USDX reading was below 100, then the USD has reduced in value when compared to what it was in 1973, and if it is above 100, it shows that the USD is stronger than it was in 1973. Presently, the USDX is hovering just above 80 and this means that the dollar is nearly 20% weaker than it was in 1973. The dollar was strongest around 2001 and 2002 when the USDX showed a 20% improvement.

How does the USDX affect forex trading?

The Dollar Index is very useful for forex traders that trade major currency pairs and gold. For instance, when the USD gains strength, Gold prices fall heavily,  this means that Gold traders will be interested in watching out for a breakout on the Dollar Index charts even though they may not really be trading the US index. Also, global crises often lead to an increase in demand for the USD as most investors around the globe continue to seek shelter from uncertainty. This will lead to an increase in the value of the USD, and a general drop in bond yields.  These are two major ways in which the USDX is used as an inter-market tool that can help in evaluating the flow of capital, and the search for new trading entries.

To get the US dollar index charts, you need to confirm that your forex broker offers it.  If they don’t, you will have to open a forex demo account with other brokers that offer it. Alternatively, you can open a futures account.

Now, one thing you must note is that the relationship between the USDX and the other pairs mentioned isn’t different from correlation as we know it amongst certain currency pairs. This means that you cannot expect that the counter movements will occur 100% of the time. There are numerous occasions in the past when both the USDX and Gold went in one direction for days. So do not throw caution to the wind when using the USDX for your forex analysis.



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