By Forex Mansion
The US dollar index (USDX) is a critical tool for trade analysis. The USDX is a measure of the value of the US dollar (USD) against a group of six other currencies: the euro (EUR), the pound sterling (GBP), the Canadian dollar (CAD), the Swedish krona (SEK), the Swiss franc (CHF), and the Japanese yen (JPY). The statistical weight of each country against the dollar is not even; the euro comprises over 50% of the statistical weight, while the Swiss franc is less than 4%. In addition to being a measuring tool, the USDX can also be traded as a futures contract. A futures contract is an agreed contract between two financial parties to buy or sell a given standardized asset at a future point in time at a previously agreed-upon price. That means USDX can be traded like gold, oil, or other commodities. Nonetheless, most traders use the USDX as a tool to analyze the financial strength of the dollar relative to the major world currencies.
Due to the heavy statistical weight of the euro in the USDX, any trader will notice great similarity in the charted fluctuation of the USDX and the EUR/USD index, however, a keen-eye will discern that the USDX gives a more precise and more accurate picture of the positioning of the US dollar against most of the major, free-floating world currencies.
The USDX was started in 1973 shortly after the dissolving of the Bretton Woods system. (The Bretton Woods system was a system of monetary management active from the 1945 to 1973 that established rules between the major industrialized nations for finance and commerce). At its inception, the USDX was given a starting value of 100.000. Since then, it has traded at a value as high as 148.1244 (in Feb. 1985) and as low as 70.698 (in Mar. 2008). In the past month to the writing of this article, the USDX has been vacillating between 78.50 and 81.50. That means that the dollar is approximately 20% weaker than its starting value in 1973.
The USDX also serves as a useful tool for traders in the commodities market, as well as forex. For example, a weak USD index is often associated with high gold prices. Since the US economy is the strongest economy in the world, during periods of destabilization in other economies traders often seek refuge in the relative stability of the US dollar, which in turn kicks-up the value of the USDX.
As mentioned previously, the USDX serves both as a financial analysis tool and as a futures contract. One can also trade ETF’s (exchange-traded funds) that are based on the USDX. An exchange traded fund is an investment fund that holds assets and is traded much like stocks on the stock market. The majority of ETF’s track an index. There is the powershares Deutsche Bank USDX bullish (UUP), which in English is a family of ETF’s meant to replicate the performance of the USDX for a long term investment. Another option is the powershares Deutsche Bank USDX bearish (UDN), which is like UUP but for short futures contracts.
For the online forex in the US market the USDX is an essential tool for reading the market and knowing when to make the right move. Learn more Forex Trading and stocks day trading at http://www.forexmansion.com.
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This article in http://www.forexinusa.com will give you helpful information about using the US dollar index (USDX) in forex trading in order to ensure more successful trading online.
