Understanding Indexes: The DXY
Indexes are by far one of the most important tools in the world of trading. Rather than focusing on one individual asset at a time, indexes allow us to look at a basket of similar assets under the umbrella of one singular averaged chart. In this article series, we will be looking at the most important indexes used by traders, in both cryptocurrency and traditional markets.
What is the DXY
The DXY, or U.S. Dollar Index is a measure of the value of the U.S. Dollar in a relative perspective to six other foreign currencies. It is maintained by Intercontinental Exchange Inc, or ICE. The basket of currencies which currently make up the DXY are listed as follows:
Although these six currencies currently make up the DXY, they are subject to future revision. For example, both the Swedish Krona and the Swiss Franc are smaller global trading partners than China, Mexico, South Korea, and Brazil. This means that we may eventually see the one or more of these nation’s currencies replacing the Krona, and or the Franc at some point in the future. It’s also possible that other currencies may eventually be added to the DXY rather than replacing those which the DXY already consist of.
History of the DXY
The DXY was created as a replacement for the Bretton Woods system. The Bretton Woods system was a unified, fixed rate system which was shared between the Allied Nations, which was formed shortly after the second world war. Eventually this would come to be known as the Bretton Woods agreement of 1944. By 1985, the Intercontinental Exchange Commission took over the DXY. That same year, the DXY peaked at its all-time high of $162.72 because of the first ever DXY futures trading. by 2008, the DXY has reached it’s all time low of $70.57 in March of 2008.
How the DXY Moves
First and foremost, if the DXY raises, it will push the USD base pairs higher, and push USD quote pairs lower. USD base pair – such as USD/CHF, and USD/CAD will move with the DXY, as all these currencies are incorporated into the DXY, with USD being on the front end. Inversely USD quote pairs – such as EUR/USD and XAU/USD – will move in the opposite direction of the DXY, creating more space between the quote pairs and the DXY, as USD is on the tail end of these pairs. Another notable component of the DXY is that it shares a directly inverse correlation with the EUR/USD, as the Euro makes up almost 60 percent of the DXY currency basket.
Using the DXY
All asset prices are affected by world events, however the DXY is heavily affected by the media. The DXY often increases on days where there is dollar-positive news and decreases on days where there is dollar-negative news. As an example, The DXY will rise whenever the USD is mentioned on television, in a positive light. In the same way, the DXY will lower in value when dollar-negative news – such as war casualties – are at the forefront of the media. Sometimes however this isn’t always the case. On September 11, 2001, the DXY was unaffected by the attack on the World Trade Center in New York, New York. That being said, the DXY correlates enough to provide palpable data.
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