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How to invest in U.S. Dollar Index?

The performance of the U.S. dollar against a basket of other currencies is measured in real time by the U.S. Dollar Index. It is a popular method of monitoring the value of the world's most traded currency and an important market in itself. Find out here how the Dollar Index works and how to trade it using a Plus500 account.

What is the DXY?

The U.S. Dollar Index, or DXY for short, measures the value of the USD in international markets by tracking the exchange rates of the U.S. dollar against six other currencies. The index increases when the dollar appreciates against foreign currencies and decreases when the dollar depreciates. Among forex traders, the index is often referred to as the DXY, USDX, or the "Dixie".

History of the US Dollar Index

After the end of the Bretton Woods Agreement, the USDX made its debut in 1973. The central bank agreement expanded trade and financial ties between the governments of the United States, Canada, Western European nations and Australia, while facilitating monetary policy interactions between sovereign states. The gold standard, which had directly linked the value of the dollar to the precious metal, was abolished shortly after Bretton Woods. The dollar index gave the markets a way to calculate the value of the world's reserve currency. Since 1985, the index has been managed by the Intercontinental Exchange (ICE).

How is the dollar index calculated?

The euro, Japanese yen, British pound, Canadian dollar, Swedish krona and Swiss franc are the six currencies used to calculate the U.S. dollar index. The index was created in 1974, and at that time these currencies were chosen. Since then, the index currencies have undergone only one change: in 1999, the euro replaced a number of European currencies. These included the German mark, the French franc, the Italian lira and other currencies.

What is the weighting of the Dollar Index?

The weighting of the Dollar Index reflects its value relative to the U.S. dollar. The value of each currency is multiplied by the weight it has in the index. The largest component of the USDX, representing 57.6% of the basket, is the Euro. The other currencies in the basket are weighted as follows:

• JPY (13.6%)
• GBP (11.9%)
• CAD (9.1%)
• SEK (4.2%)
• CHF (3.6%)

Trading the DXY with Plus500

• Create a Plus500 account.
• Add money so you can start trading now.
• Enter "US dollar index" in the online browser or mobile app.
• To enter a long or short position, click on "buy" or "sell".

Ups and Downs of the U.S. Dollar Index

Throughout its existence, the USDX price has fluctuated wildly and, unlike other indices, has not risen overall since its inception. It really hit its peak on March 5, 1985, with a high of 163.83. The record low was reached on April 22, 2008, at the beginning of the great financial meltdown, making it much more recent. A simple check reveals whether the U.S. dollar is stronger now than it was in 1974, since the index started at 100.

What affects the price of the U.S. Dollar Index?

Macroeconomic events, statistics such as GDP, the state of each country's economy and the monetary and fiscal policies of each central bank all influence the price of the USDX. Safe haven inflows have a significant impact on the price of the US Dollar Index. In times of ambiguity, the index may rise if traders view the U.S. dollar as a store of value during a global economic crisis. If investors sell their dollar holdings and move into riskier assets, the index may fall.

How to trade U.S. Dollar Indices?

There are two forms of analysis that can be used to help determine whether to buy or sell investments in U.S. dollar indices:

• Technical analysis. This involves analyzing the price movement to find repeated patterns of behavior. Many traders can also look for information on potential market reversal points by using technical indicators on historical US Dollar Index data.
• Fundamental analysis This involves analyzing press releases related to the U.S. Dollar Index to identify trends and potential future market movements. U.S. economic data, such as the release of employment statistics, central bank policy, retail sales, and the like, will be the most important press releases on the U.S. Dollar Index. By using the Plus500 calendar, you can track all the impending economic announcements regarding the US dollar.

The Best U.S. Dollar Indices Trading Strategies: How to Choose One

It is essential that we understand the ideal practices for selecting a trading strategy before moving on to examine the U.S. Dollar Indices. There are three main factors that must be considered throughout this procedure.

• The time period. It is essential to choose a time period that suits your trading strategy. A trader will notice a significant difference between trading on a weekly chart and a 15-minute chart. Focus on shorter time frames, such as 1–15-minute charts, if you are more likely to become a scalper, a U.S. Dollar Indices trader who seeks to profit from minor market movements. On the other hand, swing U.S. Dollar Indices traders are more likely to create lucrative trading opportunities using a 4-hour chart as well as a daily chart. Therefore, be sure to determine your desired trading time frame before choosing your preferred trading technique.
• Position Size. Choosing the ideal U.S. Dollar Indices trade size is crucial. Knowing your attitude towards risk is essential for effective U.S. Dollar Indices trading techniques. Taking more risk than you can handle can result in significant losses. Setting a risk limit for each trade is a common tip in this regard. In order to avoid risking more than 1% of their account on a single trade, traders often impose a 1% limit on their trades. If the risk limit is set at 1%, for example, you can risk up to $300 on a single trade if your account is worth $30,000. You can change this restriction to 0.5% or 2% depending on your attitude towards risk. Generally speaking, the larger the position size, the fewer trades you intend to open, and vice versa.

F.A.Q

Explore frequently asked questions about liquidity, trading, and ETFs related to the U.S. Dollar Index.

• How liquid is the U.S. Dollar Index? The spot currency market, which ICE estimates has a daily turnover of over $2 trillion, provides liquidity for the U.S. Dollar Index futures contract. In electronic trading, there is a market maker application that helps maintain consistent liquidity throughout the day.
• Can I trade the U.S. Dollar Index? With a Plus500 demo account, you can trade virtual assets on the DXY and other real markets. The DXY is often used by many individuals to monitor the value of the most traded currency internationally.
• Does the U.S. currency have its own ETF? ETFs that are long the dollar (USD) aim to profit from the currency's appreciation against a basket of other developed market currencies. These include the yen, loonie, Australian dollar, pound, franc and euro. To do this, the funds have a range of forward contracts and swaps.