Dollar Index

Dollar Index is widely use term when we trade in Forex or Gold. Majority of traders don’t know what exactly USD Index is. Most of traders have a misconception is USD Index means price of dollar. It is partially true but USD Index is more than that.

Dollar Index represents the value of US Dollar in terms of a basket of six world currencies. In these six currencies Euro has widest share of 57.6%, Japanese Yen is at second number with 13.6%, third number is occupied by UK’s Pound with 11.9%, 4th spot is with Canadian Dollar with 9.1%, 5th place is Swedish Krona with 4.2% and final 6th place is with Swiss Franc occupying its 3.6%. It is an exchange traded ( FINEX ) Index and its a worldwide standard.

Dollar Index started trading in 1973, Its lifetime high was near 164 in February 1985, Lowest it went till 70 range in recession of 2008.

Index was tweaked once in 1999 when Euro was introduced and it was included in index due to its major circulation in entire Europe.

Dollar Index and Gold Price Correlation

Dollar Index and Gold has major relation. As we all know gold is a safe haven asset for investors. There are two following relation between gold and USD index.

  1. 1- When investors wants to park their money in any asset, They asses if gold give them better value or US Dollar. If they choose gold then USD Index tend to go down if they choose to invest in dollar, Gold price may crash. Now days we are seeing this current scenario which is extremely unlikely. US and China are between trade war and we are seeing rise in Dollar Index as investors are betting more on greenback than gold. Due to investor’s money we are seeing rising dollar index and crashing gold prices.
  2. 2- When US Dollar gets stronger, It takes fewer dollars to buy gold as its priced in US Dollar, When dollar gets weaker it takes more dollars to purchase gold. So If Dollar Index is trading at 90 and it goes towards 92 then it takes fewer dollar to buy gold eventually reducing gold prices in $.

If USD Index crash till 88 then it would take more dollar to purchase same quantity of gold, eventually inflating gold prices.

Usually USD Index is effected by Fed interest rate hike decisions and other major events which effects equity markets and US economy.

As you can see in below chart from April USD Index has recovered from 88 to 94+. It has recovered and broke almost all resistance in its way.

dollar index chart

Watch below chart gold has lost more than 150$ since April, Bullion market crashed as greenback started charging from april and recovered from 88 to 94-95 levels now.

gold chart

Different between DXX and DXY

Sometime in my analysis i write DXX and sometime i mention DXY. There is major different between DXX and DXY. DXY is a spot price while DXX is futures. I usually quote spot price when tweeting or writing forecast. DXY is more accurate in terms of price as it tends to trade better. Its easier to follow as well. You may follow DXY price here.

Hope you enjoyed this article.

Wishing you Happy trading

Mohammad Arafat

By marafat