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| |  Click here to watch the video explaining how you can use the U.S. Dollar Index.
The US dollar index (USDX) is an important analytical tool for traders in just about any market. The USDX is actually a futures contract which means that if you had a futures trading account you could trade this instrument like corn, oil, gold or currency futures contracts. | | However rather than trading the USDX most retail traders use it as way to analyze the relative strength or weakness of the US Dollar versus the major world currencies. The USDX compares the US dollar (USD) against a basket of other world currencies. This basket represents most of the largest free floating, major currencies in the world on a weighted average basis. The currencies included are the euro, yen, British pound, Canadian dollar, Swedish krona and Swiss franc. Each of these currencies are given a weight with the largest weight given to the euro. Because the euro is typically half the total weight included in the average the chart for the USDX will often look like a chart of the USD/EUR futures contract. Spot forex traders will notice that the USDX is very similar to an inverse of the EUR/USD spot contract. However, because the USDX includes 6 different currencies it is a better measure of USD strength than any single currency pair including the EUR/USD. The USDX is particularly useful for traders in the bond, currency and gold markets. For example, a strong USD will drive down the price of gold, which means that gold traders are very interested in a break out on the USDX even though they may not be trading the USD directly. Similarly, global crises often increase demand for the USD as investors seek a
shelter from uncertainty. This will drive the value of the USD up and often bond yields will drop. These are just two examples of how the USDX is one more intermarket tool you can use for evaluating capital flows and finding new trading opportunties. | | | | | | | | |
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