Understanding the Dollar Index
The US Dollar Index (USDX) is an currency index of the value of the United States (US) dollar relative to a basket of foreign currencies. Dollar Index is weighted geometric mean of the dollar’s value compared only with its “baker” of 6 other major currencies across the world. These are :
- Euro (EUR) having around 57.6% weight
- Japanese yen (JPY) having around 13.6% weight
- Pound sterling (GBP), having around 11.9% weight
- Canadian dollar (CAD), having around 9.1% weight
- Swedish krona (SEK), having around 4.2% weight and
- Swiss franc (CHF) having around 3.6% weight
- Dollar index DX goes up when the US dollar gains “strength” against to other countries (above) currencies.
- Generally it goes up when Dollar gains against these currencies. It is an indication of US macro Economic activity or any other economic and non-economic activity which can strengthen or weaken US dollar.
- Dollar Index was started in March 1973, soon after the dismantling of the Bretton Woods system. In the start, the value of the US Dollar Index was measured in (base) of 100. It went a high of 148. Plus in February 1985, and made a low iof 70on March 16, 2008. Presently, it is trading around 80. The “basket” has been changed only once in its history, when Euro was introduce in the year 1999.
- Incase of Euro there are 17 members of the European Union that have adopted the euro as their sole currency. Other currcncy are country specific currency.
- This index is observed acorrs the world for currency market as US dollar contribute the most in global trade. Dollar is universal accepted currency across the world. This benchmark is is a very good tool for measuring the U.S. dollar’s global strength.
How it affects commodities Move
- Investors sometimes overlook how the strength of the US dollar impacts commodity prices. But, this consideration is an very important one as it can material impact on “bottom-line”
- Commodities , especially , gold follow the inverse relationship with the value of the dollar for a long period of time & the reason has been historically proven. Secondly, as and when the dollar gains against other major currencies, the price of the commodity generally goes down. When the value of the dollar weakens against other currencies, we have seen that the the prices of commodities generally goes up.
- The main reason for why the dollar holds influence is due to the fact that across the global commodity are priced in US dollar. As such, when the value of the US dollar rises, it can often drag down commodity prices. Otherwise, when the value of the dollar drops, commodity prices rise as the demand & purchasing power of buyer goes up
This inverse relationship between dollar and commodity can certainly benefit from keeping an eye on it.
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