Forex

US Dollar Index

Hi there!

The most traded pairs - that are called Majors - are the pairs that the US dollar is a part of them or by other means that traded against the US dollar (for example the EURUSD pair which is the most traded pair in the world, the EURO is traded against the US dollar).
Any trader will notice the strong relationship between these pairs which called “Correlation” for example when the EURO raise against the US dollar it’s very likely that the GBP will raise against the USD and also the JPY and CHF. We can say in this case the US Dollar had been declined against the other major currencies. Or we can say “The US dollar index had been declined”.

What’s the USDX (US Dollar Index)?

The US dollar Index (USDX) is a measurement of the US dollar value by comparing the US dollar against the majors currencies traded as pairs with the US dollar. The selected currencies are 6 currencies: the euro, Japanese yen, Canadian dollar, British pound, Swedish krona and Swiss franc. This index started in 1973 with a base of 100 and is relative to this base.

How the USDX is calculated?

As mentioned above the USDX is calculated against 6 currencies and it is calculated with this formula:

USDX = 50.14348112 × EURUSD^-0.576 × USDJPY^0.136 × GBPUSD^-0.119 × USDCAD^0.091 × USDSEK^0.042 × USDCHF^0.036

In the formula above we can notice two things:

1- Not all the currencies have the same weight, but there are currencies more important than others. Table 1 and image 1 show the weight of each currency.

Currency	Weight
Euro EUR	0.576
Japanese Yen JPY	0.136
British Pound GBP	0.119
Canadian Dollar CAD	0.091
Swedish Krona SEK	0.042
Swiss France CHF	0.036

2- When the the USD is the base currency the value is positive and when it the USD is the quote currency the value is negative.

Note: The above value is compared against the US Dollar relative to March 1973. March 1973 was chosen as a base period because it represents a significant milestone in foreign exchange history when the world’s major trading nations allowed their currencies to float freely against each other.

What the USDX is useful for?

It’s very obvious that when the strength or weakness of the US dollar in the USDX means the same strength or weakness against the currencies that the USD is a part of its pairs. So, you can use the USDX to predict the movement of your favorite pair. Also it’s recommended to observe the other pairs related to the USD while you observing your favorite pair.

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