You have definitely heard of stock market indices in the past. The Dow, S&P500 are examples in the stock market. Dow, for example, is a stock market index, shows how 30 large publicly owned companies based in the United States have traded during a standard trading session in the stock market. Similarly, the U.S Dollar Index is the value of the United States dollar relative to a basket of foreign currencies. The basket consists of 6 currencies in the following proportion. 1. Euro (EUR), 57.6% weight 2. Pound sterling (GBP), 11.9% weight 3. Canadian dollar (CAD), 9.1% weight 4. Swedish krona (SEK), 4.2% weight 5. Swiss franc (CHF) 3.6% weight 6. Japanese Yen (JPY) 13.6% weight Though there are only 6 currencies, the US dollar is pegged against 21 countries directly (16 countries that accepted EURO and the other 5). USDX goes up when the US dollar gains “strength” (value) when compared to other currencies. Also, since the EURO has a majority weight the USD is highly dependant on the strength (or weakness) of the EURO. Reading the US Dollar Index This index started in 1973 with a base of 100 and is relative to this base. This means that a value of 120 would suggest that the U.S. dollar experienced a 20% increase in value over the time period. 85% means the dollar depreciated by 15%. The value is calculated everyday Monday to Friday. US Dollar Index in Forex Since the value of the US dollar is directly proportional to the USDX, any currency pair that involves USD will move in tandem with the index. It is most effective against EUR/USD since the Euro is inversely proportional to the USDX. Hence, the US dollar index is a great tool if you are trading any currency pair that involves the USD or the EUR. If the USDX moves in one direction it is most likely that the US currency pairs will follow suit.

What is US Dollar Index (USDX)?

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