US Dollar Index
The US Dollar Index (USDX) is widely traded, with investors speculating on its price through CFDs, ETFs, futures, options and other popular vehicles. In this trading tutorial, we explain how to invest in the US Dollar Index, uncover the factors affecting the index, plus unpack historical data and future forecasts with chart and graph analysis.
To start trading, use our ranking of the best US Dollar Index brokers and apps in 2023.
What Is The US Dollar Index?
The US Dollar Index is used to give an average value for the relative performance of the US Dollar against other currencies. The value is calculated by comparing the dollar to a basket of currencies from major nations, including the UK, Canada and Switzerland.
The index is available as a spot and futures index, tracking the current and predicted values of the US Dollar against other currencies. The index has two common symbols: USDX and DXY.
There are several ways to start trading the US Dollar Index, including CFDs, ETFs, and options. Due to its ability to track the performance of the US Dollar independently of a single currency pair, the USDX is also used to hedge trades dependent on the value of the US Dollar.
How Does The US Dollar Index Work?
The current USDX components are made up of the Euro, Japanese Yen, Great British Pound, Canadian Dollar, Swedish Krona and Swiss Franc.
The USDX value calculation follows the formula:
- 57.6% Euro
- 13.6% Japanese Yen
- 11.9% British Pound
- 9.1% Canadian Dollar
- 4.2% Swedish Krona
- 3.6% Swiss Franc
However, a common criticism of the US Dollar Index is that its basket of currencies does not reflect all of the current major currencies and global trading powers.
Furthermore, the USD/EUR pair makes up almost 60% of the index composition, making it vulnerable to Euro-based fluctuations rather than USD-based determinants.
The US Dollar Index has a long history spanning half a century.
From 1944, major global currencies were pegged to the US Dollar, which was in turn pegged to the price of gold. The dollar was used as the global reserve currency and was exchangeable for gold at a fixed rate of $25 per ounce. This was known as the “Bretton Woods Agreement”.
However, the fixed value of the dollar caused issues when, in 1973, many considered the dollar overvalued. After mounting economic and global political pressure, then-president Richard Nixon ended the relationship between the US Dollar and gold. As a result of this news, many of the nations tied into the Bretton Woods agreement let their currencies float unpegged to the US Dollar.
In order for these newly unpegged global currencies to be tracked versus USD, the US Dollar Index was created in 1973. The index has been running since, allowing traders to access half a century of charts and historical data.
The most recent news was in 1999, when the Euro replaced the various European currencies it previously followed. The US Dollar Index continues to track the USD in relation to several global currencies (EUR, JPY, GBP, CAD, SEK, CHF).
The USDX’s all-time high was in February 1985 when the index price reached close to 164.72 – almost 65 points above the base level of 100 that the index began at in 1973.
The all-time low of the USDX was during the 2008 financial crisis when the price fell to 70.698.
Live Price Chart
Price Determinants Explained
When making US Dollar Index performance predictions, it is important to understand the trading economics of the index. In addition to technical analysis, a good trader considers fundamentals.
So, want to know why the dollar index is rising or falling? Here are some of the main reasons for price movements:
Exposure To The Euro
The high weighting of the Euro within the US Dollar Index composition means that the price is highly susceptible to changes in the value of the Euro. This is because the index still uses a fixed weighting based on 1973 exchange rates, when currencies like the German Deutschemark and French Franc were in use.
A weaker Euro will usually lead to an increase in the price of the US Dollar Index, while a stronger Euro makes for a decreased DXY value. In addition, issues within a country that uses the Euro can lead to a loss of value in the currency, such as the recent struggles within Greece. Conversely, the Euro can be bolstered by positive announcements from the European Central Bank (ECB).
US Economic Health
As one would expect, central to the USDX trading economics is the financial health of the US nation. This is a multifaceted price determinant, encompassing factors such as employment rates, government debt data and stock market performance (such as the Dow Jones and Nasdaq).
US Dollar Inflation
Interest rates and inflation are integral to the US Dollar Index’s value. Adjusted inflation measures the increase in the price of a range of items and metrics, including food, wages, raw materials and commodity prices. This performance data has a significant impact on the strength and volatility of a currency.
When trading the US Dollar Index, investors can profit from predictions of upcoming interest rates and inflation announcements– especially on the futures markets. An interest or inflation rate above the market’s predicted value may increase the value of the USDX. The inverse is also true, with the US Dollar Index futures price potentially rising following a high interest rate or inflation announcement.
How To Trade The US Dollar Index
The US Dollar Index is a popular global asset, and investing can take many forms. Those that wish to trade the US Dollar Index can do so via ETFs, CFDs, mutual funds, options, and other instruments.
Traders can choose between spot and futures speculation on the USDX. The former trades on the current values of the basket of currencies, while the latter uses dated contracts for the future delivery of these assets. Futures are often more volatile than spot prices, which is important to acknowledge when building a trading strategy.
Here are some of the use cases for different instruments. Investors could:
- Short the DXY using ETFs with 2x or 3x leverage
- Use CFDs to access leverage of up to 1:500 long or short
- Buy USD Dollar Index shares using a bullish mutual fund
Pros Of Trading The US Dollar Index
- Diversification – Due to the basket of currencies used in the US Dollar Index calculator, the price is more reflective of the value of the USD than the other currencies.
- Long and short options – It is easy to figure out how to short the USDX with many ready-made short ETFs in addition to ample CFD products.
- Simple to understand – The price determinants of the US Dollar Index are relatively straightforward, with simple trading economics often behind why the dollar index is rising or falling.
- Long-standing asset – The USDX has 50 years of historical prices and daily, monthly and real-time chart data to analyze.
- Trading vehicles – Investors can trade the US Dollar Index via CFDs, ETFs, options and many more instruments.
Cons Of Trading The US Dollar Index
- High EUR exposure – The USDX basket of currencies is made up heavily of the EUR/USD pair with almost 60% weighting. This means that changes vs the Euro can move the index significantly despite no changes in the dollar’s value.
- Outdated composition – As its last update was in 1999, the USDX is missing some of the most significant and traded currencies now. For this reason, many investors favour the Trade Weighted Dollar Index.
How To Invest In The US Dollar Index
We’ve put together a beginner-friendly guide explaining how to trade the US Dollar Index:
Choose An Instrument
The first step to trading the US Dollar Index is deciding which trading product you want. Investors can choose from ETFs, CFDs, vanilla options, mutual funds, and several other vehicles listed above.
This choice will depend on the type of investing you wish to do, and the leverage you wish to use. For example, a trader who wants to trade an upcoming price decrease with leverage can open a short CFD contract. Alternatively, an investor that wants to use the DXY as a hedge against inflation or rising interest rates can use an ETF or mutual fund.
Find A Broker
Once you have decided on the instrument(s) you wish to use, it is time to choose a trading broker. This broker must support your chosen trading instrument and be available in your jurisdiction.
A good broker will fulfil several basic criteria, including:
- Being regulated by a reputable body such as the FCA or SEC
- Offering competitive trading and fee structures
- Supporting a variety of secure and fast payment methods
- Supporting at least one user-friendly and capable trading platform
- Providing a helpful and accessible customer support team
Once you have decided on your USDX broker, create an account. This is usually a straightforward process, though some firms require verification details such as copies of IDs, passports or bank statements.
Next up is to fund your account with trading capital. If you plan to trade a leveraged US Dollar Index product on margin, ensure that you have sufficient capital to avoid a fast stop-out or margin call.
Place Your Trade
The next step is finding the trading product you want to trade on the broker’s platform. Investors can set up alerts and notifications or add USDX products to their favourites for easy navigation.
After finding your favored product, it is time to place your trade. Conduct US Dollar Index technical and fundamental analysis before speculating.
Investors can go long or short on the US Dollar Index, using a market order or setting a limit order to enact a position at a preset price. In addition, consider setting a stop loss and take profit levels, or using a more advanced trailing stop or trailing buy tool where it is supported.
Close Your Trade
Monitor the market for the best opportunity to close your trade, taking your profit or closing out your losses.
With some instruments like binary options, an early cash out may not be possible. In these instances, hedging a trade to either lock in a profit or minimize losses may be possible.
There is talk of the US Dollar Index currencies undergoing an update to offer a more modern and diversified composition.
Experts forecast the addition of popular USD trading partners Mexico and China by replacing some of the 57.6% Euro exposure with Chinese Yuan and Mexican Pesos.
US Dollar Index futures are monitored by the CFTC, which may offer some reassurance to investors in place of complete protection.
What hours can you trade the US Dollar Index? The spot and futures US Dollar Indices trade on the New York stock market, where investors can receive live charts and quotes during NYSE trading hours.
Due to the popularity of this asset, it trades on extended hours from 8 pm to 5 pm ET from Monday to Friday. There is also a 30-minute pre-market session from 7:30 pm.
Final Word On Trading The US Dollar Index
The US Dollar Index is a popular asset with investors, trading as a spot and futures index through ETF, options and mutual funds, CFD, and binary options products. Understanding the DXY is straightforward due to its heavy Euro weighting. However, how the US Dollar Index is calculated has stayed the same since 1999, and many believe the basket of currencies used to calculate the index requires an update.
To get started, open an account with one of the best US Dollar Index brokers in 2023.
Why Is The US Dollar Index Important?
The USDX is historically significant as it represents the end of the relationship between the US Dollar and gold. Now, it is a valuable barometer for evaluating the strength of the US Dollar vs foreign monies such as the Euro, Pound and Canadian Dollar.
What Does The US Dollar Index Mean And Represent?
The USDX is a US Dollar strength index – a high value means that the dollar is strong compared to a basket of major global currencies, while a low price signifies a reduced value compared to these assets.
How Is The US Dollar Index Calculated?
The US Dollar Index is calculated by combining the price movements of a basket of currencies, including the Euro (57.6%), Japanese Yen (13.6%), Great British Pound (11.9%) and Canadian Dollar (9.1%).
What Trading Options Do Investors Have On The US Dollar Index?
Investors can choose from CFD speculation, long and short (inverse) US Dollar Index tracker ETFs, options trading, mutual funds and several more forms of investing. Use our trading tutorial to get started. Our guide unpacks definitions and meanings of key USDX terms, the role of the federal reserve, and more.
What Moves The US Dollar Index?
Traders often ask, “why is the US Dollar Index falling?” or “why is the Dollar Index rising?” The Dollar Index moves based on the strength of the USD compared to other major currencies, with lots of exposure to the Euro. Therefore, inflation, interest rates, stock market performance and regional economic data can all impact the strength of the US Dollar.