Hello everyone!
There are many tools on the market to understand the general state of the economy or the company.
As a rule, indexes are responsible for this.
And today we will discuss the Dollar Index.
A little history
In 1973, the dollar Index (DXY) was invented and first introduced by JP Morgan.
Level 100 is the base value of the index. If the instrument shows, for example, a value of 110, it means that the dollar has grown by 10% relative to the base value.
As you may remember, in March 1973, the largest countries in the world introduced a floating exchange rate – this date was the beginning of the index.
About the index
With the help of the dollar index, analysts determine the strength of the dollar as a whole. This is a very simple analysis tool that almost every analyst uses and shows the index how strong or weak the dollar is relative to other world currencies.
Method of calculating the dollar index
The index consists of weighted components of the following currencies: euro (57.5%), Japanese yen (13.6%), British pound sterling (11.9%), Canadian dollar (9.1%), Swedish krona (4.2%) and Swiss franc (3.6%).
As you can see, the currencies with which the dollar is compared are European countries, which is why DXY is called an "anti-European" index.
Based on the number of currencies in the index, people believe that the US is compared with six European countries, which is incorrect, since the euro is officially the currency of 19 EU countries: Austria, Belgium, Germany, Greece, Ireland, Spain, Italy, Cyprus, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, Finland, France, Estonia.
Add to this 5 more countries — Japan, Great Britain, Canada, Sweden and Switzerland and we get almost the entire civilized world.
Although all countries are united by one currency, their economies are still different and therefore each currency of a separate country has a corresponding weight in the index.
Dollar Smile
One of the Morgan Stanley analysts noticed an interesting feature of the dollar – the dollar can strengthen in both bad and good economic conditions. This analyst was Stephen Jen and it was he who came up with the "dollar smile theory", the essence of which is that the dollar adheres to three scenarios:
1. "safe harbor" - investors believe that the economy is experiencing difficulties, so everyone is investing in less risky dollar assets.
2. When the US economy is weak, the dollar falls. The fall is strongly influenced by interest rates, as a result, everyone gets rid of the dollar, and the smile becomes wider.
3. Perhaps the easiest period to understand is the growth of the dollar due to the economic growth of the United States.
People increasingly believe in the country and the currency, which contributes to a greater growth of the dollar.
Thanks to this theory, it is easier to understand the market situation in general and the cyclical nature of the market.
How to use the index
The index is usually used to analyze currency pairs.
The index helps to determine the relative strength of the currency relative to the dollar, at those moments when you trade currencies in which there is USD, for example, EURUSD, GBPUSD, USDCHF, etc. The
index is also used to find discrepancies.
If DXY falls and the dollar weakens, then you will see growth on the GBPUSD chart. If the dollar is the base currency, for example, USDJPY, then the index and the currency pair will move in the same direction.
Often you will notice that the dollar index is growing, and the currency pair is standing still – this is the discrepancy, which is very profitable for an observant analyst.
In addition to correlation with currency pairs, DXY correlates with oil.
The fact is that the largest oil consumers are hedgers of dollar inflation. Hence the inverse correlation of these instruments.
Professional analysts, before currency trading, look at the dollar index to understand the trend directions.
Conclusions
Thanks to the index, you can understand the state of the US economy.
DXY is a great addition to your strategy, which helps you identify trends or find discrepancies on the charts.
Using the index you will avoid mistakes and increase your profit.
There are many tools on the market to understand the general state of the economy or the company.
As a rule, indexes are responsible for this.
And today we will discuss the Dollar Index.
A little history
In 1973, the dollar Index (DXY) was invented and first introduced by JP Morgan.
Level 100 is the base value of the index. If the instrument shows, for example, a value of 110, it means that the dollar has grown by 10% relative to the base value.
As you may remember, in March 1973, the largest countries in the world introduced a floating exchange rate – this date was the beginning of the index.
About the index
With the help of the dollar index, analysts determine the strength of the dollar as a whole. This is a very simple analysis tool that almost every analyst uses and shows the index how strong or weak the dollar is relative to other world currencies.
Method of calculating the dollar index
The index consists of weighted components of the following currencies: euro (57.5%), Japanese yen (13.6%), British pound sterling (11.9%), Canadian dollar (9.1%), Swedish krona (4.2%) and Swiss franc (3.6%).
As you can see, the currencies with which the dollar is compared are European countries, which is why DXY is called an "anti-European" index.
Based on the number of currencies in the index, people believe that the US is compared with six European countries, which is incorrect, since the euro is officially the currency of 19 EU countries: Austria, Belgium, Germany, Greece, Ireland, Spain, Italy, Cyprus, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, Finland, France, Estonia.
Add to this 5 more countries — Japan, Great Britain, Canada, Sweden and Switzerland and we get almost the entire civilized world.
Although all countries are united by one currency, their economies are still different and therefore each currency of a separate country has a corresponding weight in the index.
Dollar Smile
One of the Morgan Stanley analysts noticed an interesting feature of the dollar – the dollar can strengthen in both bad and good economic conditions. This analyst was Stephen Jen and it was he who came up with the "dollar smile theory", the essence of which is that the dollar adheres to three scenarios:
1. "safe harbor" - investors believe that the economy is experiencing difficulties, so everyone is investing in less risky dollar assets.
2. When the US economy is weak, the dollar falls. The fall is strongly influenced by interest rates, as a result, everyone gets rid of the dollar, and the smile becomes wider.
3. Perhaps the easiest period to understand is the growth of the dollar due to the economic growth of the United States.
People increasingly believe in the country and the currency, which contributes to a greater growth of the dollar.
Thanks to this theory, it is easier to understand the market situation in general and the cyclical nature of the market.
How to use the index
The index is usually used to analyze currency pairs.
The index helps to determine the relative strength of the currency relative to the dollar, at those moments when you trade currencies in which there is USD, for example, EURUSD, GBPUSD, USDCHF, etc. The
index is also used to find discrepancies.
If DXY falls and the dollar weakens, then you will see growth on the GBPUSD chart. If the dollar is the base currency, for example, USDJPY, then the index and the currency pair will move in the same direction.
Often you will notice that the dollar index is growing, and the currency pair is standing still – this is the discrepancy, which is very profitable for an observant analyst.
In addition to correlation with currency pairs, DXY correlates with oil.
The fact is that the largest oil consumers are hedgers of dollar inflation. Hence the inverse correlation of these instruments.
Professional analysts, before currency trading, look at the dollar index to understand the trend directions.
Conclusions
Thanks to the index, you can understand the state of the US economy.
DXY is a great addition to your strategy, which helps you identify trends or find discrepancies on the charts.
Using the index you will avoid mistakes and increase your profit.
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🔻FREE Telegram channel🔻
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🔻Contact for Paid SIGNALS🔻
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