The Dollar Index and the US Dollar
The US Dollar is the most traded and talked about asset globally. The greenback (as it’s otherwise known) is unique to any other currency as it is a bedrock of the global economy and a reserve currency for international trade and finance.
Like any other currencies, the dollar’s relative value depends on the economic activity and outlook of the United States as well as technical and fundamental factors, and the market psychological aspects of trading.
Most traders are looking to trade trend patterns instead of more complex price movements such as retracements and ranges. When trading trends, it is important to understand the level of strength or weakness of a currency in all time-frames: short, medium and long term. Traders wish to buy when the US Dollar is strong and appreciating, and sell it when it’s weak and depreciating.
The US Dollar Index
To understand the Strength of the Dollar, traders can analyse the US Dollar Index. This is a great tool to understand whether the Dollar is appreciating or depreciating. Traders should note that if the Dollar is seeing an upward trend against one or two currencies, it does not mean the dollar is appreciating in value overall. This is where a trader can refer to the US Dollar Index to ensure they are purchasing dollars at a time when the Dollar is strengthening overall.
The contempt of the US Dollar Index is simple. The only 3 factors you need to know are:
- The US Dollar Index is used to measure the value of the dollar against a basket of six world currencies – Euro, Swiss Franc, Japanese Yen, Canadian Dollar, British Pound, and Swedish Krona.
- The Euro is the largest component of the index, making up almost 58% of the overall index. The weights of the rest of the currencies in the index are: Japanese Yen – 13.6%, British Pound – 11.9%, Canadian Dollar – 9.1%, Swedish Krona – 4.2%, Swiss Franc – 3.6%.
- The value of the index is a fair indication of the dollar’s value in global markets.
Traders should also note that if the US Dollar is increasing in value or is strong, based on what the Index is showing, it does not mean that a US Dollar currency pair cannot decrease in value. Traders must bear in mind that forex instruments are based on 2 currencies. When trading, individuals need to take into consideration both currencies, not just the USD.
The US Dollar Index is not an instrument which can be traded but can be used to assist in trading Major and Exotic US Dollar pairs. The chart and price movement of the US Dollar Index can be found via multiple sites such as investing.com or marketwatch.com.
The US Dollar this Week so far
On Tuesday, the US dollar generally weakened against its main competitors and the US Dollar Index decreased in value as it did at the start of the week.
In the absence of significant releases and bank holidays on Monday, investors are most likely focused on the prospects of reopening the US economy, as the quarantine measures are weakening in most states. In particular, all retail stores should open in California, if the social distance is kept.
Some lifting will also be introduced for religious needs in churches, where up to 100 people at a time can attend masses. One should also note that the US company Novavax announced the start of a test of an experimental vaccine against coronavirus, which also encourages the market.
The main fundamental release on Tuesday for the Dollar was the CB Consumer Confidence which came in lower than expected, further weakening the sentiment surrounding the US Dollar. On Thursday and Friday, the market will wait for the release of GDP figures and the speech from the Federal Reserve which is likely to increase the level of volatility.
In conclusion, the US Dollar is where most traders and organisations are focussing, pushing it to become one of the world’s Reserve currencies and at the centre of most financial markets. The US Dollar Index is a great tool, which traders can use to trade on US Dollar currency pairs, alongside other technical and fundamental aspects of their analysis process.