For 60 years, the US dollar maintains its position as a reserve monetary unit in the world economy, its share in sales with major currencies is approximately 50%.
In March 1973, when the Bretton Woods system ceased to exist, replacing the economic system based on the “gold standard,” the US dollar index USDX was introduced. The objective of this index is to map the USD relationship to a basket of key currencies of the world economy, which include: the common European currency - the euro (EUR), the British pound sterling (GBP), the Canadian dollar (CAD), the Swedish krona (SEK), the Swiss franc ( CHF) and Japanese Yen (JPY).
Each of these currencies in the currency basket has its own weight, reflected in a percentage it looks like this:
CHF – 3,6%,
SEK – 4,2%,
CAD – 9,1%,
GBP – 11,9%,
JPY – 13,6%,
EUR – 57,6%
It is curious that the structure of the currency basket has changed only once, when in 1999 the eurozone countries switched to using the euro.
USDX, in the period of its own appearance, had a value of 100 points. February 1985 was significant for this indicator in that its maximum value was reached, equal to 148.1 pt. At the beginning of the global economic crisis, on the contrary, at least USDX was registered at its minimum - 70.7 pt. Trading in the index takes place 24 hours a day for 5 days a week, during the operation of the global currency markets.
USDX is calculated as the geometric weighted average of a basket of currencies. The formula for its calculation is as follows:
USDXt=50,14348112 x (EURt)-0,576 x (JPYt)0,136 x (GBPt)-0,119 x (CADt)0,091 x (SEKt)0,042 x (CHFt)0,036
The power coefficients in the formula shown are in accordance with the weight of global currencies in the currency basket. The calculation of the index is in accordance with the data that the US Federal Reserve uses, calculating the trade-weighted indicator of the US dollar relative to the monetary units of the countries that form the main part of the US foreign trade.
The biggest share of United States international trade falls to the European Union (57.6%), followed by Japan (13.6%), United Kingdom (11.9%), Canada (9.1%), Sweden (4.2%) and Switzerland (3.6%).
USD Index in Forex Trading
Even using the offers of the most reliable international broker PaxForex, a trader must constantly remember that regardless of the aspirations of the trading community, the US dollar sets trends in major world currencies. For this reason, the USD index acts as a starting point in order to establish the weakness or strength of the American currency in currency pairs.
Most often, when the directionality of the USDX index changes, it entails a change of directionality in currency pairs, where the US dollar is directly present. For example, if there is an uptrend of the index, in this case, pairs with a direct quotation will almost certainly increase (USDCHF, USDCAD and others), while currency pairs in which the currency quotation is inverse (EURUSD, GBPUSD, etc.) will decrease.
The strength of the US dollar in terms of long-term trends and short-term reversals can be analyzed by using technical analysis tools - support / resistance levels, moving averages, Japanese candles. Using these tools, you can get an idea of how the moods of market participants change.
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