The US Dollar Index shouldn’t be confused with the trade-weighted US Dollar Index, the Bloomberg Dollar Index, the Wall Street Journal Dollar Index or other calculations for a broad measure of the US currency. Although they’re all moving closely in tandem with one another and are measuring an equivalent thing, their formulas are different, thus they don’t always produce an equivalent results.
The DXY value may be a weighted calculation of the USD value against the subsequent basket of currencies:
- Euro (EUR) 57.6%
- Japanese yen (JPY) 13.6%
- British Pound (GBP), 11.9%
- Canadian dollar (CAD), 9.1%
- Swedish krona (SEK), 4.2%
- Swiss franc (CHF) 3.6%
As you’ll probably see from the weighted percentages, the Euro accounts for quite half the Dollar Index. As a result, the EURUSD currency pair and therefore the DXY are closely correlated (inversely).
The US Dollar could also be rising against the Euro and therefore the British pound, but it’s going to be falling versus the Japanese Yen or the Australian dollar .
The US Dollar Index comes in handy in such situations as it’s an accurate measure of current USD trends. It shows the combined performance of the Dollar versus its peers. If the Dollar Index is rising then the USD is probably going rallying against most of the opposite currencies.
The reasons for why a currency pair is moving are important and therefore the USD Index is one among the primary indicators to seem at so as to work out that. USD driven movements in currencies could also be because of global factors or US-specific factors and determining that’s important for fundamental analysis.
Furthermore, the chart of the US Dollar Index are often wont to do an overall technical analysis of the USD currency in isolation of Forex pairs. Since tons of traders and investors follow the USD Index chart and lots of are even trading it (via futures or options contracts), support and resistance, also as patterns on the chart of the USD Index, can often cause subsequent reactions across the Fx market in major pairs such as EURUSD, GBPUSD, USDJPY etc.