The U.S. Dollar Index is one of the most reckoned currency indexes and trades on exchanges with the DXY ticker or the USDX ticker. This index has been around in the market since 1973, when the base value was kept at 100,000.00, which is now 100.00.
It is a very prominent factor that facilitates Greenback. And the basket used to measure the U.S. dollar index value has only been changed once post-Euro replaced many other European currencies in 1999.
Formula To Calculate USDX
USDX = 50.14348112 * the EUR/USD exchange rate ^ (-0.576) * the USD/JPY exchange rate ^ (0.136) * the GBP/USD exchange rate ^ (-0.119) X the USD/CAD exchange rate ^ (0.091) × the USD/SEK exchange rate ^ (0.042) * the USD/CHF exchange rate ^ (0.036).
Implementing The US Dollar Index to Trade Forex
The movement determined in the U.S. currency index, such as the USDX, offers traders a sense of how the currency is experiencing a change in its value against other currencies in the index. For instance, if there is a rise in the USDX level, this indicates the rise in the U.S. dollar. Similarly, when the level of USDX is falling, so is the dollar in the foreign exchange market.
Many financial reporters leverage the changes witnessed in the U.S. Dollar Index’s value to offer their viewers and audiences an idea of how the U.S. dollar performed in the foreign exchange market. This works as an alternative to analyzing how each currency increased or decreased against the dollar.
Moreover, the USDX can also act as an inverse indicator that reflects the strength of the consolidated Euro currency of the European Union, considering that the weight of Euro (57.6%) is the most in the index.
Another prominent aspect that the forex trader should consider is how the movements of the USDX is associated with the other currencies that are put against the U.S. Dollar.
For instance, when the currency pair is measured as USD/JPY, it is likely to be positively correlated, and both the currencies should rise and fall at the same time.
Contrarily, when the currency pair is measured like EUR/USD, then the currency pair and USDX are inversely correlated. This implies that they are likely to move in the opposite direction, where one will fall when the other rises.