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A Brief Explanation of the Dollar Index

The Dollar Index What rebateforexindonesia the Dollar Index?  If you have traded stocks, you are most likely quite familiar with a number of stock highestrebateforexdices, such as: the Shanghai Composite Index, the Shenzhen Composite Index, the Dow Jones Industrials, the NASDAQ, the S&P 500, etc. Since stocks have corresponding indices, the U.S. Forex rebate for you is no exception For currency traders, we have the U.S. dollar getforexrebate (USDX) It is a composite reflection of the U.S. dollar It measures the degree of change in the dollars exchange rate against a basket of cashback forex by calculating the combined rate of change of the dollar Forexrebateforyou against a selected basket of currencies to measure the strength of the dollar What is it saying? After seeing this annoying definition, we know youre probably about to drift off to sleep Well, before you doze off, lets break it down A basket of currencies The U.S. dollar index is made up of six major currencies, which are: •The euro•The yen•The pound•The Canadian dollar•The Swedish krona •CHF Here is a question if the dollar index consists of 6 currencies, how many countries are actually included in it?  If you say 6, then, you are wrong If you say 22, then, you are a genius There are 22 countries in total, as 17 of the EU member states have now adopted the Euro as their single currency, plus five other countries (Japan, the UK, Canada, Sweden, and Switzerland) Obviously, 22 However, the other currencies are very closely linked to the dollar index which makes it a good indicator of the strength of the dollar globally The dollar index components We already know what currencies make up the dollar index, now lets get back to the weighted part of it Since the size of each country is different, each currency is given a different value when calculating the dollar index. When calculating the dollar index, it is only fair that each currency is given the right weighting Lets look at the current weights:   Since the eurozone consists of 16 countries, the euro also has the largest weight in the dollar index followed by the yen, since Japan is also one of the largest economies in the world The other four national currencies have less than 30% weight in the dollar index  nbsp;Heres a very interesting phenomenon: when the euro falls, how will the dollar index go?  The weight of the euro in the dollar index is so large that we can basically call the dollar index the anti-euro index Since the dollar index is greatly influenced by the movement of the euro, people have begun to look for a balanced dollar index However, this change will not happen immediately How to read the dollar index Like some currency pairs, the dollar index also has its own technical Chart First, note that the dollar index is calculated 24 hours a day, 5 days a week. This means that the dollar has risen 20.65% since the index was created The dollar index calculation began in March 1973March 1973 was chosen as the reference point because it was a historic moment in the turnaround of the foreign exchange market, when the major trading nations allowed their currencies to float freely with another countrys currencyThe dollar index began in what is also known as the benchmark period  nbsp;Dollar index formula USDX=50.14348112EUR/USD^(-0.576)USD/JPY^(0.136)GBP/USD^(-0.119)USD/CAD^(0.091)USD/SEK^(0.042)USD/CHF^(0.036)& nbsp;Trade Weighted Dollar Index The Federal Reserve will also use another form of dollar index we call the Trade Weighted Dollar Index The Federal Reserve wanted to create an index based on the competitiveness of U.S. goods relative to other countries goods that more accurately reflects the value of the dollar relative to other countries currencies The Trade Weighted Dollar Index was formed in 1998 The currency and their weights The table below lists the weights of the major currencies in the dollar trade-weighted index:  The weights are as of August 2012 The main difference between the dollar index and the dollar trade-weighted index is the basket of currencies selected and their relative weights The dollar trade-weighted index includes the currencies of major countries around the world The dollar trade-weighted index includes the currencies of major countries around the world, and it also includes some developing country currencies Given the growth of global trade, the dollar index is likely to better reflect the value of the dollar on a global scale The weights are selected based on annual trade data The weighting data for the dollar index can be found at: /releases/H10/Weights. If you want to view historical data, click on  Forex trading with the US Dollar Index You must be thinking, how do I use it in my trading? Dont worry, the answer is coming soonWe know that the vast majority of widely traded currency pairs contain the US dollarIf you dont know, listen up, the likes of EUR/USD, GBP/USD, USD/CHF, USD/JPY, and USD/CAD all contain the US dollar in their trades What does this mean? If you trade in these combinations, the dollar index will be second only to sliced bread (or burgers or buns…… or chocolate ice cream) as the best thing If you dont participate in the underlying trades, the dollar index will also give you an idea of how strong the dollar is in the world In fact, when the outlook for the dollar market is unclear, in most cases, the dollar index will Indicate the outlook for the dollar market In the wide world of forex, the dollar index can be used as an indicator of whether the dollar is strong because the euro is over 50% weighted in the composition of the dollar index and there is a very tight negative correlation between the euro/dollar movement and the dollar index This is like a mirror image If one goes up, the other is likely to go down Do you see it? The trend lines look almost exactly inversely correlated which will help those who trade EUR/USD If the USD Index moves significantly, you can be almost certain that forex traders will act accordingly The USD Index and spot forex traders interact with each other A breakout in the spot USD pair will almost certainly lead to a similar breakout in the USD Index Overall, forex traders will For example, if the dollar index is strong and rising, and you are trading EUR/USD, a strong dollar will show up on the technical charts as a falling EUR/USD if the dollar is the base currency in the portfolio you are trading, such as USD/CHF, a rising dollar index will mean that USD/CHF is likely to be in an uptrend as well. Here are two things you should keep in mind: If the dollar is the base currency (USD/XXX), then the dollar index should move in the same direction as the currency pair; If the dollar is the quote currency (XXX/USD), then the dollar index should move in the opposite direction as the currency pair Dollar Smile Theory Ever wonder why the dollar strengthens in both recessions and booms? Well, others have had similar questions In fact, a smart brother who worked at Morgan Stanley came up with a theory to explain this phenomenon Former currency strategy analyst and economist Ren Yongli came up with a theory and named it the Dollar Smile Theory His theory depicts 3 scenarios that guide the behavior of the dollar Scenario 1: The dollar appreciates due to risk aversion Smile The first part of the smiley shows that the dollar benefits from risk aversion Risk aversion causes investors to flee to safe haven currencies such as the dollar and the yen As investors perceive the global economic situation to be unstable, they hesitate to continue to chase risky assets and increase their willingness to purchase less risky dollars, regardless of the state of the U.S. economy Scenario 2: The dollar falls to new lows The bottom of the smiley reflects the dull performance of the dollar, which This performance is due to the weakness of the US economic fundamentals and the possibility of a rate cut which would also devalue the dollar, causing the market to start avoiding the dollar. Sell! Sell! Scenario 3: The dollar strengthens on the back of economic growth Eventually, the smiles show as the U.S. economy finally sees the light of hope Optimism rises, economic turnaround signals emerge and investor confidence in the dollar begins to rise In other words, as the U.S. economy enjoys a stronger GDP growth rate and expectations of interest rate hikes grow, the dollar begins to appreciate when the financial crisis emerged in 2007 This theory looks like it has started to work Remember, the dollar strengthened sharply when the extent of the global recession peaked? That was the first stage When the market finally came out of the bottom in March 2009, all of a sudden, investors began to switch to high-yielding currencies, which gave the dollar the distinction of being the worst performing currency in 2009   So does the dollar smile theory hold true?  Time will tell In any case, this is a theory to keep in mind Remember, the economy is cyclical The key is to find where the economy is in the cycle 

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